Category Archives: Regulation

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

Auto Insurance, Highway Safety, Legal Environment, Regulation

New Illinois Bills
Would Harm — Not Help — Auto Policyholders

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Two bills proposed in Illinois this year illustrate yet again the need for lawmakers to better understand how insurance works. Illinois HB 4767 and HB 4611 – like their 2023 predecessor, HB 2203 – would harm the very policyholders the measures aim to help by driving up the cost for insurers to write personal auto coverage in the state.

“These bills, while intended to address rising insurance costs, would have the opposite impact and likely harm consumers by reducing competition and increasing costs for Illinois drivers,” said a press release issued by the American Property Casualty Insurance Association, the Illinois Insurance Association, and the National Association of Mutual Insurance Companies. “Insurance rates are first and foremost a function of claims and their costs. Rather than working to help make roadways safer and reduce costs, these bills seek to change the state’s insurance rating law and prohibit the use of factors that are highly predictive of the risk of a future loss.”

The proposed laws would bar insurers from considering nondriving factors that are demonstrably predictive of claims when setting premium rates.

“Prohibiting highly accurate rating factors…disconnects price from the risk of future loss, which necessarily means high-risk drivers will pay less and lower-risk drivers will pay more than they otherwise would pay,” the release says. “Additionally, changing the rating law and factors used will not change the economics or crash statistics that are the primary drivers of the cost of insurance in the state.”

Triple-I agrees with the key concerns raised by the other trade organizations. As we have written previously, such legislation 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.

What is risk-based pricing?

Simply put, risk-based pricing means offering different prices for the same level of coverage, based on risk factors specific to the insured person or property. If policies were not priced this way – if insurers had to come up with a one-size-fits-all price for auto coverage that didn’t consider vehicle type and use, where and how much the car will be driven, and so forth – lower-risk drivers would subsidize riskier ones. Risk-based pricing allows insurers to offer the lowest possible premiums to policyholders with the most favorable risk factors. Charging higher premiums to insure higher-risk policyholders enables insurers to underwrite a wider range of coverages, thus improving both availability and affordability of insurance.

This simple concept becomes complicated when actuarially sound rating factors intersect with other attributes in ways that can be perceived as unfairly discriminatory. For example, concerns have been 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 sometimes charged more than their suburban neighbors for the same coverage.

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

While it may be hard for policyholders to believe factors like age, gender, and credit score have anything to do with their likelihood of filing claims, the charts below demonstrate clear correlations.

Policyholders have reasonable concerns about rising premium rates. It’s important for them and their legislators to understand that the current high-rate environment has nothing to do with the application of actuarially sound rating factors and everything to do with increasing insurer losses associated with higher frequency and severity of claims. Frequency and claims trends are driven by a wide range of causes – such as riskier driving behavior and legal system abuse – that warrant the attention of policymakers. Legislators would do well to explore ways to reduce risks, contain fraud other forms of legal system abuse, and improve resilience, rather than pursuing “solutions” to restrict pricing that will only make these problem worse.

Learn More

New Triple-I Issues Brief Takes a Deep Dive into Legal System Abuse

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

How Proposition 103 Worsens Risk Crisis in California

Louisiana Still Least Affordable State for Personal Auto, Homeowners Insurance

IRC Outlines Florida’s Auto Insurance Affordability Problems

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

Colorado’s Life Insurance Data Rules Offer Glimpse of Future for P&C Writers

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

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

Litigation Funding Law Found Lacking in Transparency Department

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

Federal “Reinsurance” Proposal Raises Red Flags

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By Sean Kevelighan, Triple-I CEO

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

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

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

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

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

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

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

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

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

Sean Kevelighan, CEO, Triple-I

Learn from history

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

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

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

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

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

Time-tested principles

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

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

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

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

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

Consumers deserve real solutions

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

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

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

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

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

Learn More:

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

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

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

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

Matching Price to Peril Helps Keep Insurance Available and Affordable

Policyholder Surplus Matters: Here’s Why

Triple-I Issues Brief: Flood

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

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

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

Triple-I Issues Brief: Race and Insurance Pricing

Catastrophes, Disaster Preparedness, Disaster Resilience, Earthquakes, Emerging Risks, ESG, Flood Insurance, Floods, Insurers and the Economy, Legal Environment, Regulation, Risk Management

Triple-I Town Hall Amplified Calls
to Attack Climate Risk

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By Jeff Dunsavage, Senior Research Analyst, Triple-I

I’m pleased and proud to have been part of Triple-I’s Town Hall — “Attacking the Risk Crisis” — in Washington, D.C. In an intimate setting at the Mayflower Hotel on November 30, 120-plus attendees got to hear from experts representing insurance, government, academia, nonprofits, and other stakeholder groups on climate risk, what’s being done to address it, and what remains to be done.  

Triple-I’s first-ever Town Hall was designed as a logical step in its multi-disciplinary, action-oriented effort to change behavior to drive resilience. Capping a year in which headlines about “insurance crises” in several states garnered major media attention, Triple-I and its members and partners recognized the need for clarification.

“What we’re seeing is not an ‘insurance crisis’,” Triple-I CEO Sean Kevelighan told the standing-room-only audience. “We’re in the midst of a risk crisis. Rising insurance premium rates and availability difficulties are not the cause but a symptom of this crisis.”

Whisker Labs CEO Bob Marshall discusses innovation with moderator Jennifer Kyung, Vice President and Chief Underwriter at USAA.

While the insurance industry has a critical role to play and is uniquely well equipped to lead the attack, simply transferring risk is not enough. A recurring theme at the Town Hall was the need to shift from a focus on assessing and repairing damage to one of predicting and preventing losses.

Three moderated discussions – examining the nature of climate risk and its costs; highlighting the need of strategic innovation in mitigating those risks and building resilience; and exploring the role and impact of government policy – gave panelists the opportunity to share their insights with a diverse audience focused on collaborative action.

The agenda was:

Climate Risk Is Spiraling: What Can Be Done?

Moderator: David Wessel, Senior Fellow and Director at the Brookings Institution and former Economics Editor for The Wall Street Journal.

Panelists:

Dr. Philip Klotzbach, Colorado State University, researcher and Triple-I non-resident scholar.

Dan Kaniewski, Managing Director, Public Sector at Marsh McLennan, Former FEMA Deputy Administrator.

Jacqueline Higgins, Head, North America & Senior Vice President, Public Sector Solutions, Swiss Re

Jim Boccher, Chief Development Officer, ServiceMaster.

Jeff Huebner, Chief Risk Officer, CSAA.

Innovation, High- and Low-Tech: How Insurers Are Driving Solutions

Moderator: Jennifer Kyung, VP, Chief Underwriter, USAA.

Panelists:

Partha Srinivasa, EVP, CIO, Erie Insurance.

Sam Krishnamurthy, CTO, Digital Solutions, Crawford.

Bob Marshall, CEO, Whisker Labs.

Stephen DiCenso, Principal,Milliman.

Charlie Sidoti, Executive Director, InnSure.

Outdated Regs to Legal System Abuse: It Will Take Villages to Fix This

Moderator: Zach Warmbrodt, financial services editor, Politico.

Panelists:

Parr Schoolman, SVP and Chief Risk Officer, Allstate.

Tim Judge, SVP, Head Modeler, Chief Climate Officer, Fannie Mae.

Dan Coates, Deputy Director, DRS, Federal Housing Finance Agency.

Fred Karlinsky, Co-Chair of Greenberg Traurig’s Global Insurance Regulatory & Transactions Practice Group.

Panelists and participants alike appreciated the compact, action-focused, conversational nature of the single-afternoon event, as well as the opportunity to discuss areas in which their diverse industry- or sector-specific priorities and efforts overlapped.

If you weren’t able to join us in Washington, don’t worry. In his closing remarks, Kevelighan announced plans to take the program on the road with a local and regional focus, so stay tuned. You can contact us if you’re interested in participating in future Town Halls or other Triple-I events. You also can join the “Attacking the Risk Crisis” LinkedIn Group to be part of the ongoing conversation.

Legal Environment, Regulation

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

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By Max Dorfman, Research Writer, Triple-I

Louisiana lawmakers passed several bills to reinforce the state’s weakened property insurance market during the recently completed 2023 legislative session. These included one that would have required parties to a lawsuit to disclose third-party litigation funding agreements within 60 days of a filing. However, that legislation was vetoed by Gov. John Bel Edwards, and lawmakers do not plan to override it.

Also included was a broad ban on assignment of benefits (AOB), the practice by which policyholders sign over to a third party – a contractor, attorney, or public adjuster – their right to bill an insurance company directly for repairs or other services. While this is a common practice across the country, in some states – notably, Florida and Louisiana – it has been a source of extensive claim fraud.  

The Louisiana property insurance market has been significantly weakened since the state was hit by record hurricane activity during the 2020/2021 seasons. Indeed, 11 insurers that write homeowners coverage in Louisiana were declared insolvent between July 2021 and February 2023. Additionally, 12 insurers withdrew from the state and 50 companies stopped writing new business in hurricane-prone parishes, creating a capacity crisis.

A persistent problem

Legal system abuse has been a persistent issue in Louisiana for some time. The state’s “onerous bad faith laws contribute significantly to inflated claims payments and awards,” according to a joint paper published by the American Property Casualty Insurance Association (APCIA), the Reinsurance Association of America (RAA), and the Association of Bermuda Insurers and Reinsurers (ABIR).

These problems were highlighted in February 2023, when Insurance Commissioner Jim Donelon 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. According to Donelon, the firm filed more than 1,500 Hurricane Laura claim lawsuits in Louisiana over the span of three months in 2022, prior to the deadline to file suits over the Category 4 major hurricane that struck the state in 2020.

“The size and scope of McClenny, Moseley & Associates’ (MM&A) 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 reporting by the Times Picayune/New Orleans Advocate, an investigation by the Louisiana Department of Insurance found the Houston-based law firm engaged in insurance fraud and unfair trade practices through Alabama-based Apex Roofing and Restoration and has faced accusations of criminal behavior and mounting sanctions.  MM&A has since shut down its operations in Louisiana.

Litigation funding reform vetoed

Third-party litigation funding occurs when investors finance lawsuits against large companies in return for a share in the settlement. Funding of lawsuits by international hedge funds and other financial third parties – with no stake in the outcome other than a share of the settlement – has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even larger, at $39 billion global industry in 2019, according to Bloomberg.

Some states have considered mandating greater transparency around the practice, and Montana in May  approved legislation requiring certain disclosures in litigation financing. Louisiana’s Senate Bill 196 would have required parties to a lawsuit to disclose such arrangements within 60 days of filing a suit.

Insurer incentive grants boosted

The Louisiana Legislature also agreed to allocate an extra $10 million for the previously approved insurer incentive program, bringing to $55 million the amount available to insurers that agree to enter the state’s home insurance market to offer new coverage.

Also included in the bills is $30 million for a long-term grant program to help homeowners fortify their homes against hurricanes – a 50 percent increase over the amount Donelon discussed when planning for the legislative session.

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

Louisiana’s Insurance Woes Worsen as Florida Works to Fix Its Problems

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As Florida strives to address the issues that led to its current property/casualty insurance crisis, another hurricane-prone coastal state, Louisiana, is navigating its own insurance troubles.

The Louisiana property insurance market has been deteriorating since the state was hit by a record level of hurricane activity during the 2020/2021 seasons, Triple-I says in a new Issues Brief on the state’s insurance crisis. Twelve insurers that write homeowners coverage in Louisiana were declared insolvent between July 2021 and February 2023.

“While similarities exist between the situations in these two hurricane-prone states, the underlying causes of their insurance woes are different in important ways,” said Mark Friedlander, Triple-I’s director of corporate communications. “Florida’s problems are largely rooted in decades of litigation abuse and fraud, whereas Louisiana’s troubles have had more to do with insurers being undercapitalized and not having enough reinsurance to withstand the claims incurred during the record-setting hurricane seasons of 2020 and 2021.”

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). The growing volume of losses also drove a dozen insurers to voluntarily withdraw from the market and more than 50 to stop writing new business in hurricane-prone parishes.

This is not to say legal system abuse is absent as a factor in the Louisiana’s crisis – quite the opposite, as highlighted by Insurance Commissioner Jim Donelon’s cease-and-desist order, issued in February, against a Houston-based law firm. According to Donelon, the firm filed more than 1,500 hurricane claim lawsuits in Louisiana over the span of three months last year.

“The size and scope of McClenny, Moseley & Associates’ illegal insurance scheme is like nothing I’ve seen before,” Donelon said. “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.”

McClenny Moseley has since been suspended from practice in Louisiana’s Western District federal court over its work on Hurricane Laura insurance cases.

A regular on the American Tort Reform Foundation’s “Judicial Hellholes” list, Louisiana’s “onerous bad faith laws contribute significantly to inflated claims payments and awards,” according to a joint paper published by the American Property Casualty Insurance Association (APCIA), the Reinsurance Association of America (RAA), and the Association of Bermuda Insurers and Reinsurers (ABIR).

“Insurers who fail to pay claims or make a written offer to settle within 30 days of proof of loss may face penalties of up to 50 percent of the amount due, even for purely technical violations,” the paper notes. “To avoid incurring these massive penalties, which are meted out pursuant to highly subjective standards of conduct, insurers sometimes feel compelled to pay more than the actual value of claims as the lesser of two evils.”

As a result of these converging contributors, Louisiana Citizens Property Insurance Corp. – the state-run insurer of last resort – has grown from 35,000 to 128,000 policyholders over the past two years, according to the Louisiana Department of Insurance.

Learn More:

Louisiana Insurance Regulator Issues Cease & Desist Order to Texas Law Firm

Hurricanes Drive Louisiana Insured Losses, Insurer Insolvencies

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

U.S. Study of 3rd-party litigation fundingcites market growth,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

Louisiana Insurance Regulator IssuesCease & Desist Orderto 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

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.