Category Archives: Regulation

Catastrophes, Disaster Preparedness, Disaster Resilience, Insurers and the Economy, Regulation, Technology, Wildfire

California Finalizes Updated Modeling Rules, Clarifies Applicability Beyond Wildfire

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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 Among other things, the new rules eliminate outdated restrictions on use of catastrophe models in setting premium rates.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

Disaster Preparedness, Disaster Resilience, Flood Insurance, Floods, Insurers and the Economy, Market Conditions, Regulation, Risk Management

JIF 2024: What Resilience Success Looks Like

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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

Auto Insurance, Homeowners Insurance, Insurers and the Economy, Legal Environment, Market Conditions, Regulation

JIF 2024: What’s In a Name? When It Comes to Legal System Abuse, A Lot

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By Lewis Nibbelin, Contributing Writer, Triple-I

From “social inflation” to “tort reform” to, simply, “fraud,” settling upon uniform terminology to describe  litigation trends that drive up costs – including insurance premiums – for all Americans is a primary challenge to addressing them, according to participants at Triple-I’s 2024 Joint Industry Forum.

“As we’re trying to raise awareness of this problem with consumers, ‘social inflation’ doesn’t work,” said discussion moderator and Triple-I’s Chief Insurance Officer Dale Porfilio. Though Triple-I previously favored “social inflation,” consumer testing was done that suggested a better name was needed. “That’s when we landed on ‘legal system abuse.’”

“The name absolutely matters,” said Viji Rangaswami, senior vice president and chief public affairs officer for Liberty Mutual. “When you talk to a legislator, whether that’s in Kansas or in Washington, D.C., and you say the words, ‘social inflation,’ they don’t know what you’re talking about. But when you say the words ‘legal system abuse,’ you see the lightbulb go off.”

Louisiana Insurance Commissioner Tim Temple – a self-described “unicorn” among insurance regulators, given his decades-long background in the industry as an agent, broker, and company president – even renamed programs to address “legal system abuse” when he assumed office in January. This shift exemplifies Temple’s commitment to using his experience to shape a regulatory and statutory environment that enhances the attractiveness of Louisiana’s insurance market.

“We’re getting more buy-in now, people understand it,” Temple said. “That’s part of transparency – talking about what it truly is.”

Clear communication is key

Opaque, ill-defined language empowers predatory “billboard attorneys” to define these terms themselves, contributing to pervasive policyholder distrust, said Jeff Sauls, Farmers Insurance head of legislative affairs.

“There’s this perception of the insurance industry amongst the public – and plaintiffs’ attorneys help portray this – as a high-margin business,” he said, when, in reality, “we compete with grocery stores for who can make less money in an average year.”

Attorney advertising – estimated to total over $2.4 billion across the U.S. last year – has commandeered the messaging once associated with insurers, noted Temple, who encouraged the industry to “take back that high ground” of providing “dependability and stability during the worst days of people’s lives” without overuse of brand mascots or jingles.

“We have to remind the public why we exist,” Rangaswami added. “We want to pay claims as expeditiously as possible…. We’re on the side of the consumer, whereas the plaintiffs’ attorney is often on their own side or the investor’s side.”

Third-party litigation funding

With her reference to “investors,” Rangaswami took aim at a little-known, rapidly growing practice called third-party litigation funding (TPLF), in which investors with no stake beyond potential profit step in to fund lawsuits against corporate entities perceived as having deep pockets. As of last year, such investors retained an estimated $15.2 billion in assets for U.S. litigation alone.

Only a handful of states require mandatory disclosure of TPLF, which enables hedge funds and other foreign funders to compound and profit from protracted and even fraudulent U.S. court cases. Secrecy surrounding TPLF prevents insurers and regulators from identifying, let alone mitigating, the risks of increased costs and time to resolve claims disputes.

Preventing adversaries to the U.S. from exploiting TPLF to influence settlement outcomes and access sensitive defense information is another concern.

“We’re looking at TPLF as potentially exacerbating national security risk,” said Jerry Theodorou, policy director for finance, insurance, and trade at the R Street Institute. “Most people don’t know what TPLF is and the way it can insidiously impact the economy, our businesses, our jobs.”

Everyone is affected

Legal system abuse costs the highly litigious states Louisiana and Georgia over 175,000 jobs combined and thousand-dollar “tort taxes” for each resident per year, earning both states recurring spots on the American Tort Reform Foundation’s list of “Judicial Hellholes.” They also rank among the least affordable places for auto and homeowners’ insurance by the Insurance Research Council – an affiliate of The Institutes, like Triple-I.

Louisiana recently enacted a law enforcing some oversight over TPLF, Temple noted, as well as repealed a unique “three-year rule” that impeded actuarially-sound underwriting. But as the state’s bodily injury claims climb well over the national average, more reform is needed to return insurance profitability to the state.

“One thing I would look to is importing some of the good things Florida has done,” Theodorou suggested, explaining that reform curtailing contingency and one-way attorneys’ fees “have brought down the number of lawsuits against insurance companies by 24 percent” for the second consecutive three-quarter period. “Notice of intention to sue is also down by double digits. It’s working, so let’s learn from that.”

Considering the fact that the former “poster child” for legal system abuse generated over 70 percent of all homeowners insurance litigation nationally in 2022 – despite accounting for only about 15 percent of total homeowners claims – Florida’s reduced premium growth and nine new property insurers this year reveal the likely efficacy of such reforms in other states.

Education and coalition building

But such reform requires advocacy, which requires consumer education and coalition building across diverse stakeholder groups, Rangaswami pointed out.

Fixing “an economy-wide problem,” she explained, requires an “economy-wide coalition.”

The end goal is not a “tilted playing field,” Sauls emphasized. “We’re trying to get to a place where we are all on level footing, without being exploited by plaintiffs’ attorneys.”

Legal system abuse “is going to be a pressure point for the industry moving forward,” stressed Fred Karlinsky, shareholder and global chair of Greenberg Traurig, LLP. “No state is immune from what we’ve seen in Florida.”

Karlinsky emphasized that spreading normalization of “nuclear” (over $10 million) and an emergent class of “thermonuclear” (over $100 million) verdicts will stall reform in newly targeted states.

Rangaswami pointed out that not all the news has been bad.

“We had some great wins in 2024,” she said, citing Florida’s improved insurance market and legislation introduced at both the federal and state levels as movement in a promising direction. “But we have to keep this momentum up.”

Learn More:

Triple-I Issues Brief: Legal System Abuse

Agents Play Critical Role in Navigating Impacts of Legal System Abuse on Customers

Legal System Abuse/Social Inflation Adds Costs and Challenges for US Casualty Insurance: AM Best

Who’s Financing Legal System Abuse? Louisianans Need to Know

Legal Reforms Boost Florida Insurance Market; Premium Relief Will Require More Time

How Georgia Might Learn From Florida Reforms

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

Inflation Continues to Drive Up Consumers’ Insurance CostsTriple-I Launches Campaign to Highlight Challenges to Insurance Affordability in Georgia

Legal Environment, Market Conditions, Regulation

How Georgia Might Learn From Florida Reforms

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By Lewis Nibbelin, Contributing Writer, Triple-I

Georgia – frequently featured on the American Tort Reform Foundation’s list of “Judicial Hellholes” – may want to consider imitating its neighbor Florida in pursuing legal system abuse reforms, Triple-I CEO Sean Kevelighan suggested in a recent  interview for WBS News/Talk Radio. 

In 2022 – the year Category 4 Hurricane Ian tore through the southeast United States – over 70 percent of all homeowners insurance litigation nationally was generated in Florida, when the state accounted for only about 9 percent of total homeowners claims.

“We actually saw six insurers go insolvent even before Ian hit,” Kevelighan said. 

An exodus of insurance carriers, paired with an estimated $10 billion loss in post-Ian litigated claims, prompted Florida policymakers to enact laws targeting excessive one-way attorney fees and prohibiting assignment of benefits (AOB) to curtail gratuitous or fraudulent litigation.

Legal system abuse drives up costs for everyone

Such litigation increases the costs and time to settle insurance claims, which insurers must account for when predicting loss trends and setting rates. 

“The price of insurance is the price of the risk,” Kevelighan explained. “If you have a high-litigation area, that’s risky, and it’s going to be more expensive.” 

Costly, protracted claims disputes – especially ones involving unnecessary judicial intervention – can outprice consumers and insurers, leading many to cease offering coverage in the state or to declare insolvency.

Insurance costs in Florida have stabilized since legislators passed legal system abuse reforms in 2022 and 2023, reducing premium growth and attracting nine new property insurers to the market this year, Kevelighan said.

Under these reforms, “the risk level is getting lower and that allows the cost of insurance to go down,” he said. Underwriting losses in 2023 reflected this trend, as Florida’s property insurance market recorded a much smaller loss than in recent years. Most Florida carriers have filed for no rate increases – or even decreases – this year, Kevelighan said.

Though Hurricanes Helene and Milton will likely constrain Florida’s 2024 underwriting profitability, insurers are well-equipped to settle claims more quickly, with some industry experts suggesting the market could sufficiently cover another hurricane later this season.

Lessons for Georgia

Plaintiffs’ attorneys who profited from claim fraud in Florida have transferred their exploitative practices and billboard marketing to states with fewer and/or antiquated regulations – especially Georgia, recently ranked one of the least affordable states for auto insurance by the Insurance Research Council (IRC), a division of The Institutes.

“The litigation is just creeping across the border into Georgia,” he said. “It’s estimated that the GDP of legal system abuse impacts the economy about $13 billion annually in Georgia alone.”

In Georgia, Kevelighan said, unfettered anchoring tactics – which “anchor” juries to extraordinary non-economic damage awards as a baseline – propel Georgia’s abnormally high rate of excessive verdicts.

Profuse and inflated litigation impedes coverage affordability and availability and creates undue “tort taxes” that cost individual Georgians $1,372 per year, even as trial attorneys in the state invested hundreds of millions into advertising in 2023.

A new IRC survey supports a positive correlation between consumers who consult attorneys and those who are exposed to attorney advertising. Though most consumers believe this advertising increases the cost of auto insurance, most also remain impartial. Greater public outreach and tort reform are needed to stop and prevent legal system abuse.

While amending a court system hostile to defendants requires extensive coordinated efforts, Florida’s recent legislative reforms have already improved the state’s insurance landscape, demonstrating the efficacy of passing similar laws in other areas. To advocate for tort reform in Georgia, the Triple-I recently launched a multi-faceted campaign that includes highway and digital bus shelter billboards promoting an educational consumer website.

“We want to inform consumers that litigation doesn’t need to be a first step in claim disputes, but should be more of a last resort,” Kevelighan said. “We’re trying to help raise awareness so that reform does pass, and that we can reduce the risk level, so that we can reduce the price levels.”

Georgia Gov. Brian Kemp’s interest in addressing tort reform during the 2025 Georgia General Assembly promises “more movement,” Kevelighan added.

It’s not too late to register for Triple-I’s “Joint Industry Forum” in Miami November 19th and 20th, where legal system abuse will be a major topic of conversation.

Learn More:

Triple-I Launches Campaign to Highlight Challenges to Insurance Affordability in Georgia

Georgia Is Among the Least Affordable States for Auto Insurance

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

Auto Insurance, ESG, Homeowners Insurance, Regulation, Technology

Actuarial Studies Advance Discussion
on Bias, Modeling, and A.I.

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The Casualty Actuarial Society (CAS) has added to its growing body of research to help actuaries detect and address potential bias in property/casualty insurance pricing with four new reports. The latest reports explore different aspects of unintentional bias and offer forward-looking solutions.

The first  – “A Practical Guide to Navigating Fairness in Insurance Pricing” – addresses regulatory concerns about how the industry’s increased use of models, machine learning, and artificial intelligence (AI) may contribute to or amplify unfair discrimination. It provides actuaries with information and tools to proactively consider fairness in their modeling process and navigate this new regulatory landscape.

The second new paper — “Regulatory Perspectives on Algorithmic Bias and Unfair Discrimination” – presents the findings of a survey of state insurance commissioners that was designed to better understand their concerns about discrimination. The survey found that, of the 10 insurance departments that responded, most are concerned about the issue but few are actively investigating it. Most said they believe the burden should be on the insurers to detect and test their models for potential algorithmic bias.

The third paper – “Balancing Risk Assessment and Social Fairness: An Auto Telematics Case Study” – explores the possibility of using telematics and usage-based insurance technologies to reduce dependence on sensitive information when pricing insurance. Actuaries commonly rely on demographic factors, such as age and gender, when deciding insurance premiums. However, some people regard that approach as an unfair use of personal information. The CAS analysis found that telematics variables –such as miles driven, hard braking, hard acceleration, and days of the week driven – significantly reduce the need to include age, sex, and marital status in the claim frequency and severity models.

Finally, the fourth paper – “Comparison of Regulatory Framework for Non-Discriminatory AI Usage in Insurance” – provides an overview of the evolving regulatory landscape for the use of AI in the insurance industry across the United States, the European Union, China, and Canada. The paper compares regulatory approaches in those jurisdictions, emphasizing the importance of transparency, traceability, governance, risk management, testing, documentation, and accountability to ensure non-discriminatory AI use. It underscores the necessity for actuaries to stay informed about these regulatory trends to comply with regulations and manage risks effectively in their professional practice.

There is no place for unfair discrimination in today’s insurance marketplace. In addition to being fundamentally unfair, to discriminate on the basis of race, religion, ethnicity, sexual orientation – or any factor that doesn’t directly affect the risk being insured – would simply be bad business in today’s diverse society.  Algorithms and AI hold great promise for ensuring equitable risk-based pricing, and insurers and actuaries are uniquely positioned to lead the public conversation to help ensure these tools don’t introduce or amplify biases.

Learn More:

Insurers Need to Lead on Ethical Use of AI

Bringing Clarity to Concerns About Race in Insurance Pricing

Actuaries Tackle Race in Insurance Pricing

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

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

New Illinois Bills Would Harm — Not Help — Auto Policyholders

Corporate Social Responsibility, Legal Environment, Regulation, Technology, Webinars

Insurers Need to Lead
on Ethical Use of AI

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Every major technological advancement prompts new ethical concerns or shines a fresh light on existing ones. Artificial intelligence is no different in that regard. As the property/casualty insurance industry taps the speed and efficiency generative AI offers and navigates the practical complexities of the AI toolset, ethical considerations must remain in the foreground.  

Traditional AI systems recognize patterns in data to make predictions. Generative AI goes beyond predicting – it generates new data as its primary output.  As a result, it can support strategy and decision making through conversational, back-and-forth “prompting” using natural language, rather than complicated, time-consuming coding.

A recently published report by Triple-I and SAS, a global leader in data and AI, discusses how insurers are uniquely positioned to advance the conversation for ethical AI – “not just for their own businesses, but for all businesses; not just in a single country, but worldwide.” 

AI inevitably will influence the insurance sector, whether through the types of perils covered or by influencing how insurance functions like underwriting, pricing, policy administration, and claims processing and payment are carried out. By shaping an ethical approach to implementing AI tools, insurers can better balance risk with innovation for their own businesses, as well as for their customers.

Conversely, failure to help guide AI’s evolution could leave insurers — and their clients — at a disadvantage. Without proactive engagement, insurers will likely find themselves adapting to practices that might not fully consider the specific needs of their industry or their clients. Further, if AI is regulated without insurers’ input, those regulations could fail to account for the complexity of insurance – leading to guidelines that are less effective or equitable.

“When it comes to artificial intelligence, insurers must work alongside regulators to build trust,” said Matthew McHatten, president and CEO of MMG Insurance, in a webinar introducing the report. “Carriers can add valuable context that guides the regulatory conversation while emphasizing the value AI can bring to our policyholders.” 

During the webinar, Peter L. Miller, CPCU, president and CEO of The Institutes, noted that generative AI already is helping insurers “move from repairing and replacing after a loss occurs to predicting and preventing losses from ever happening in the first place,” as well as enabling efficiencies across the risk-management and insurance value chain.

Jennifer Kyung, chief underwriting officer for USAA, discussed several use cases involving AI, including analyzing aerial images to identify exposures for her company’s members. If a potential condition concern is identified, she said, “We can trigger an inspection or we can reach out to those members and have a conversation around mitigation.”

USAA also uses AI to transcribe customer calls and “identify themes that help us improve the quality of our service.”  Future use cases Kyung discussed include using AI to analyze claim files and other large swaths of unstructured data to improve cost efficiency and customer experience.

Mike Fitzgerald, advisory industry consultant for SAS, compared the risks associated with generative AI to the insurance industry’s early experience with predictive models in the early 2000s. Predictive models and insurance credit scores are two innovations that have benefited policyholders but have not always been well understood by consumers and regulators.  Such misunderstandings have led to pushback against these underwriting and pricing tools that more accurately match risk with price.

Fitzgerald advised insurers to “look back at the implementation of predictive models and how we could have done that differently.”

When it comes to AI-specific perils, Iris Devriese, underwriting and AI liability lead for Munich Re, said, “AI insurance and underwriting of AI risk is at the point in the market where cyber insurance was 25 years ago. At first, cyber policies were tailored to very specific loss scenarios… You could really see cyber insurance picking up once there was a spike of losses from cyber incidents. Once that happened, cyber was addressed in a more systematic way.”

Devriese said lawsuits related to AI are currently “in the infancy stage. We’ve all heard of IP-related lawsuits popping up and there’ve been a few regulatory agencies – especially here in the U.S. – who’ve spoken out very loudly about bias and discrimination in the use of AI models.”

She noted that AI regulations have recently been introduced in Europe.

“This will very much spur the market to form guidelines and adopt responsible AI initiatives,” Devriese said.

The Triple-I/SAS report recommends that insurers lead by example by developing their own detailed plans to deliver ethical AI in their own operations. This will position them as trusted experts to help lead the wider business and regulatory community in the implementation of ethical AI. The report includes a framework for implementing an ethical AI approach.

LEARN MORE AT JOINT INDUSTRY FORUM

Three key contributors to the project – Peter L. Miller, Matthew McHatten, and Jennifer Kyung — will share their insights on AI, climate resilience, and more at Triple-I’s Joint Industry Forum in Miami on Nov. 19-20. 

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

Economic Climate Makes Understanding Insurance Increasingly Important

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By Lewis Nibbelin, Guest Blogger for Triple-I

Insurance coverage has long been “a grudge purchase – a once-or-twice-a-year transaction that many consumers didn’t want to think about,” Triple-I CEO Sean Kevelighan said in a recent episode of the “All Eyes on Economics” podcast.

But in today’s dynamic economic environment – marked by inflation the likes of which most insurance purchasers have never experienced – it has become more important than ever for consumers and policymakers to understand how insurance is underwritten and priced.

One of Triple-I’s chief objectives is “helping people understand what insurance can do for you, but also what you can do to change the situation,” Kevelighan told podcast host and Triple-I Chief Economist and Data Scientist Michel Léonard. “The narrative seems, at least from my standpoint, to be less about, ‘Why is my insurance so high?’ It’s more about, ‘What can we do to get it lower?’”

Rising insurance premium rates are the effect of risk levels, loss costs, and economic considerations like inflation. Too often, though, they’re discussed as if they were the cause.

High property/casualty premium rates are the result of numerous coalescing factors: Increased litigation, inflation, antiquated state regulations, losses from natural catastrophes, and pervasive post-pandemic high-risk behaviors, to name a few.

Every dollar invested in disaster resilience could save 13 in property damage, remediation, and economic impact costs, according to a recent joint report from Allstate and the U.S. Chamber of Commerce. As areas vulnerable to climate disasters become increasingly populated, it’s important for policyholders to develop resilience measures against the wildfire, hurricane, severe convective storm, and flood risks their property faces.

Consumer education and community involvement in mitigation and resilience offer a path toward greater control over claims.

However, regulatory barriers to fair, accurate underwriting also contribute to higher insurance costs. Despite tort reforms, rampant litigation has kept upward pressure on rates in Florida and Louisiana. California’s outdated Proposition 103 – by barring insurers from using modeling to price risk prospectively and from taking reinsurance costs into account when setting rates – has   impeded insurers from using actuarially sound insurance pricing.

Confusion around industry practices and effective mitigation is understandable, and during periods of economic instability and unforeseen disasters, blaming the insurance industry may seem the most direct way to regain control.

But rising rates are “not just an insurance problem,” Kevelighan said. “It’s a risk problem, and we all play a role in addressing that risk.”

The full interview is available now on Spotify, Audible, and Apple.

Catastrophes, Coastal Property, Disaster Preparedness, Disaster Resilience, Flood Insurance, Floods, Homeowners Insurance, Legal Environment, Regulation, Wildfire

Triple-I Experts Speak
on Climate Risk, Resilience

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Hurricane Beryl’s rapid escalation from a tropical storm to a Category 5 hurricane does not bode well for the 2024 Atlantic Hurricane season, which is already projected to be of above-average intensity, warns Triple-I non-resident scholar Dr. Philip Klotzbach.

“This early-season storm activity is breaking records that were set in 1933 and 2005, two of the busiest Atlantic hurricane seasons on record,” Dr. Klotzbach, a research scientist in the Department of Atmospheric Science at Colorado State University, recently told The New York Times.

The quick escalation was a result of above-average sea surface temperatures. A hurricane that intensifies faster can be more dangerous as it leaves less time for people in its path to prepare and evacuate. Last October, Hurricane Otis moved up by multiple categories in just one day before striking Acapulco, Mexico, as a Cat-5 that killed more than 50 people.

After weakening to a tropical storm, Beryl made landfall as a Cat-1 hurricane near Matagorda, Texas, around 4 a.m. on July 8, according to the National Hurricane Center, making it the first named storm in the 2024 season to make landfall in the United States.  Beryl unleashed flooding rains and winds that transformed roads into rivers and ripped through power lines and tossed trees onto homes, roads, and cars. Restoring power to millions of Texans could take days or even weeks, subjecting residents who will not have air conditioning to further risk as a sweltering heatwave settles over the state.

Extreme heat was just one climate-related topic addressed by Triple-I Chief Insurance Officer Dale Porfilio in an interview with CNBC’s “Last Call” on July 9. While most farmers are insured against crop damage due to heat conditions and homeowners insurance typically covers wildfire-related losses, Porfilio noted, a “more subtle impact is on roofs that we thought were built to a 20-year lifespan.”

When subjected to extreme heat, roofs can become more brittle and prone to damage from wind or hail.

“So, you have to think about the roof coverage on your home insurance policy,” Porfilio said.

He also pointed out that flood risk represents “one of the biggest insurance gaps in this country. Over 90 percent of homeowners do not have the coverage.”

Many people incorrectly believe homeowners insurance covers flood damage or that they don’t need the coverage if their mortgage lender does not require it.

In an interview on CNBC’s “Squawk Box,” Triple-I CEO Sean Kevelighan discussed the potential impact of the predicted “well above-average” 2024 season on the U.S. property/casualty market.

“This is what the insurance industry is prepared for,” Kevelighan said. “It keeps capital on hand after writing policies to make sure that those promises can be kept.” The P/C industry has $1.1. trillion in surplus as of March 31, 2024.

Kevelighan pointed out that the challenges to the industry go beyond climate-related trends, explaining how legal system abuse, regulatory environments, shifting populations, and inflation are impacting insurers’ loss costs.

In Florida, for example, “you’ve got over 70 percent of all homeowners insurance litigation residing in that state, whereas it represents less than 10 percent of the overall claims.”

He pointed out that Florida’s insurance market has improved – with homeowners insurance premium growth  flattening somewhat – as a result of tort reform legislation and added that Louisiana’s legislature addressed insurance reform during its most recent session.

“In California, insurers can’t catch up with inflationary costs because of regulatory constraints,” Kevelighan noted. “They are not able to model [climate risk] and are not able price reinsurance into their policies.”

California’s wildfire situation is complex, and the state’s Proposition 103 has hindered insurers’ ability to profitably write homeowners coverage in that disaster-prone state. In late September 2023, California Insurance Commissioner Ricardo Lara announced a package of executive actions aimed at addressing some of the challenges included in Proposition 103. Lara has given the department a deadline of December 2024 to have the new rules completed.

Learn More:

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

Lightning-Related Claims Up Sharply in 2023

Less Severe Wildfire Season Seen; But No Less Vigilance Is Required

Accurately Writing Flood Coverage Hinges on Diverse Data Sources

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

Legal Reforms Boost Florida Insurance Market; Premium Relief Will Require More Time

2024 Wildfires Expected to Be Up From Last Year, But Still Below Average

CSU Researchers Project “Extremely Active” 2024 Hurricane Season

Triple-I Issues Brief: Hurricanes

Triple-I Issues Brief: Attacking Florida’s Property/Casualty Risk Crisis

Triple-I Issues Brief: California’s Risk Crisis

Triple-I Issues Brief: Legal System Abuse

Triple-I Issues Brief: Wildfires

Triple-I Issues Brief: Severe Convective Storms

Triple-I Issues Brief: Flood

Catastrophes, Disaster Preparedness, Disaster Resilience, Flood Insurance, Floods, Homeowners Insurance, Legal Environment, Regulation, Risk Management

Evolving Risks Demand Integrated Approaches

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Even as the Smokehouse Creek Fire – the largest wildfire ever to burn across Texas – was declared “nearly contained” this week, the Texas A&M Service warned that conditions are such that the remaining blazes could spread and even more might break out.

“Today, the fire environment will support the potential for multiple, high impact, large wildfires that are highly resistant to control” in the Texas Panhandle, the service said.

This year’s historic Texas fires – like the state’s 2021 anomalous winter storms, California’s recent flooding after years of drought, and a surge in insured losses due to severe convective storms across the United States – underscore the variability of climate-related perils and the need for insurers to be able to adapt their underwriting and pricing to reflect this dynamic environment. It also highlights the importance of using advanced data capabilities to help risk managers better understand the sources and behaviors of these events in order to predict and prevent losses.

For example, Whisker Labs – a company whose advanced sensor network helps monitor home fire perils, as well as tracking faults in the U.S. power grid – recorded about 50 such faults in Texas ahead of the Smokehouse Creek fires.

Bob Marshall, Whisker Labs founder and chief executive, told the Wall Street Journal that evidence suggests Xcel Energy’s equipment was not durable enough to withstand the kind of extreme weather the nation and world increasingly face. Xcel – a major utility with operations in Texas and other states — has acknowledged that its power lines and equipment “appear to have been involved in an ignition of the Smokehouse Creek fire.”

“We know from many recent wildfires that the consequences of poor grid resilience can be catastrophic,” said Marshall, noting that his company’s sensor network recorded similar malfunctions in Maui before last year’s deadly blaze that ripped across the town of Lahaina.

Role of government

Government has a critical role to play in addressing the risk crisis. Modernizing building and land-use codes; revising statutes that facilitate fraud and legal system abuse that drive up claim costs; investing in infrastructure to reduce costly damage related to storms – these and other avenues exist for state and federal government to aid disaster mitigation and resilience.

Too often, however, the public discussion frames the current situation as an “insurance crisis” – confusing cause with effect. Legislators, spurred by calls from their constituents for lower premiums, often propose measures that would tend to worsen the problem because they fail to reflect the importance of accurately valuing risk when pricing coverage.

The federal “reinsurance” proposal put forth in January by U.S. Rep. Adam Schiff of California is a case in point. If enacted, it would dismantle the National Flood Insurance Program (NFIP) and create a “catastrophic property loss reinsurance program” that, among other things, would set coverage thresholds and dictate rating factors based on input from a board in which the insurance industry is only nominally represented.

U.S. Rep. Maxine Waters (also of California) has proposed a Wildfire Insurance Coverage Study Act to research issues around insurance availability and affordability in wildfire-prone communities. During  House Financial Services Committee deliberations, Waters compared current challenges in these communities to conditions related to flood risk that led to the establishment of NFIP in 1968. She said there is a precedent for the federal government to step in when there is a “private market failure.”

However, flood risk in 1968 and wildfire risk in 2024 could not be more different. Before FEMA established the NFIP, private insurers were generally unwilling to underwrite flood risk because the peril was considered too unpredictable. The rise of sophisticated computer modeling has since given private insurers much greater confidence covering flood (see chart).

In California, some insurers have begun rethinking their appetite for writing homeowners insurance – not because wildfire losses make properties in the state uninsurable but because policy and regulatory decisions made over 30 years ago have made it hard to write the coverage profitably. Specifically, Proposition 103 and its regulatory implementation have blocked the use of modeling to inform underwriting and pricing and restricted insurers’ ability to incorporate reinsurance costs into their premium pricing.

California’s Insurance Commissioner Ricardo Lara last year announced a Sustainable Insurance Strategy for the state that includes allowing insurers to use forward-looking risk models that prioritize wildfire safety and mitigation and include reinsurance costs into their pricing. It is reasonable to expect that Lara’s modernization plan will lead to insurers increasing their business in the state.

It’s understandable that California legislators are eager to act on climate risk, given their long history with drought, fire, landslides and more recent experience with flooding due to “atmospheric rivers.” But it’s important that any such measures be well thought out and not exacerbate existing problems.

Partners in resilience

Insurers have been addressing climate-related risks for decades, using advanced data and analytical tools to inform underwriting and pricing to ensure sufficient funds exist to pay claims. They also have a natural stake in predicting and preventing losses, rather than just continuing to assess and pay for mounting claims.

As such, they are ideal partners for businesses, communities, governments, and nonprofits – anyone with a stake in climate risk and resilience. Triple-I is engaged in numerous projects aimed at uniting diverse parties in this effort. If you represent an organization that is working to address the risk crisis and your efforts would benefit from involvement with the insurance industry, we’d love to hear from you. Please contact us with a brief description of your work and how the insurance industry might help.

Learn More:

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

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

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

Triple-I “Trends and Insights” Issues Brief: Risk-Based Pricing of Insurance

Stemming a Rising Tide: How Insurers Can Close the Flood Protection Gap

Tamping Down Wildfire Threats

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