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Insurance Industry

Surge in U.S. auto insurer claim payouts due to economic and social inflation

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The latest Insurance Information Institute (Triple-I) research indicates that between 2013 and 2022, economic and social inflation fueled a $96 to $105 billion increase in combined claim payouts for U.S. personal and commercial auto insurer liability.  

The report “Impact of Increasing Inflation on Personal and Commercial Auto Liability Insurance” outlines Triple-I’s continued exploration of the impact of social inflation on insurer costs and claim payouts. The study proposes that increasing inflation drove loss and DCC (defense containment costs) higher in both insurance lines– by 6.5 percent ($61 billion) of total loss and DCC for personal auto and by 19 to 24 percent ($35 to $44 billion) for commercial auto. 

Key Takeaways 

  • Estimates place the average annual impact of increasing inflation at 0.6 percent for personal auto and 2.7 percent for commercial auto. 
  • The accident rate (claim frequency) declined, and claim severity (size of losses) increased dramatically for personal and commercial lines. 
  • Increasing inflation was mainly driven by social inflation factors before 2021, and since that year, it has continued as a product of economic and social inflation. 

Researchers Jim Lynch, FCAS, MAAA, Triple-I’s former chief actuary, Dave Moore, FCAS, MAAA, president, Moore Actuarial Consulting, LLC, and Dale Porfilio, FCAS, MAAA, Triple-I’s chief insurance officer, approached the topic in a manner similar to their prior collaborations (in 2022 and early 2023). They used loss development patterns to identify inflation for selected property/casualty lines in excess of inflation in the overall economy. However, they extended their methodology in this project to use annual statement data through year-end 2022. Also, in this report, the authors use the term “inflation” for the first time to convey the operative mix of social and economic inflation on insurers’ costs. 

Commercial Auto Liability 

Data indicates that commercial auto liability faces its share of challenges, too, as losses have outpaced the growth rate of the overall economy. Claim severity (size of losses) has risen 72 percent overall since 2013, with the median annual increase at 6.3 percent. The report compares this change to the annual median increase of 2.1 percent in the Consumer Price Index, an observation offered as evidence that before 2020, social inflation may have been a primary factor in loss trends.  

Researchers estimate that from 2013 to 2022, increasing inflation drove losses up by between $35 billion and $44 billion, or between 19 percent and 24 percent. The pandemic brought significant change to commercial auto liability, decreasing claim frequency while increasing claim severity more dramatically. Researchers contend the loss development factors for this line of business signal an ongoing problem of inflationary factors. 

Personal Auto Liability 

This line took in four times the net earned premiums in 2022 as commercial auto liability. However, multimillion-dollar personal auto settlements are rare; consequently, the cases have less impact on insured losses or development patterns. Premiums and insurer losses in this line fluctuated over the prior two decades but continue to increase, albeit more slowly than the overall economy. In recent years, however, losses have been growing faster than premiums. Since 2020, premiums fell 13 percent, while losses rose 15 percent. And, after 2019, severity increased dramatically, with the compound annual increase holding 3.0 percent from 2013 to 2019, then tripling to 9.2 percent compounded annually. 

 
The double whammy of economic inflation and social inflation 

The report describes the nuanced findings of personal and commercial auto liability –understandably different as these markets differ in many aspects, including size and risk factors. The analysis reveals some trends in common, however. Findings in commercial and personal auto liability indicate that the overall accident rate (claim frequency) declined during the early pandemic years, yet the severity (size of losses) increased more dramatically.  

The earliest study in this series looked at insurance trends through the end of 2019, focusing on loss development factors (LDFs). Since economic inflation was stable, but LDFs were increasing steadily during that time, the researchers concluded that economic inflation was likely not the cause of rising costs. Then, beginning in 2021, a sizable uptick in the CPI-All Urban signaled a rise in overall economic inflation.  

The resulting implications for underlying insurer costs can be observed in factors that impact claim payouts, such as replacement costs. The report states that since 2008, replacement costs for commercial and personal auto insurance have outpaced overall prices in the economy by 40 percent. Since 2019, these costs have risen almost three times faster than prices overall. Thus, for the years prior, researchers continue to attribute the bulk of losses for both lines primarily to social inflation but propose that social inflation and increasing overall economic inflation share the credit beginning in 2020. 

Triple-I plans to continue to foster a research-based conversation around social inflation. For an overview of the topic and other helpful resources about its potential impact on insurers, policyholders, and the economy, check out our knowledge hub, Social inflation: hard to measure, important to understand.  

Disaster Resilience, Floods

Attacking the Risk Crisis: Roadmap to Investment
in Flood Resilience

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As part of its attack on the risk crisis, Triple-I recently participated in a project led by the National Institute of Building Sciences (NIBS) to develop a roadmap for mitigation investment incentives. The Resilience Incentivization Roadmap 2.0 builds off research NIBS published in 2019 and focuses on urban pluvial flooding, though many of the principles can be applied to riverine and coastal flooding, as well as non-flood perils.

The roadmap draws heavily from voluntary programs that have seen success in the context of other risks – such as the Insurance Institute for Business & Home Safety (IBHS) FORTIFIED Home™ Standard and the California Earthquake Authority’s Brace + Bolt retrofit program.

“Pluvial urban flooding” refers to rainwater that can’t flow downhill fast enough to reach streams and stormwater systems and therefore backs up into buildings. Much of the inland flooding caused by Hurricane Ida (2021), Hurricane Ian (2022), and more recent flooding in California due to “atmospheric rivers” and in the Northeast would fall under this category. Common low-cost measures exist to protect buildings from such flooding, and the relative ease and affordability of such mitigations made pluvial urban flooding an appropriate initial target.

This project was a collaboration representing stakeholders in the built environment – lenders, developers, insurers, engineers, agencies, policymakers – with the goal of helping communities develop layered mitigation investment packages. Triple-I’s role was to represent the property/casualty insurance industry as a stakeholder and co-beneficiary of investment in advance mitigation and resilience.

Insurers have strong incentives to encourage policyholders to make improvements that reduce the risk of costly claims. In the case of flood risk – an increasingly expensive peril outside FEMA-designated flood zones – encouraging such improvements is preceded by a different challenge: persuading homeowners to obtain flood insurance.

About 90 percent of U.S. natural disasters involve flooding. Estimates of size of the “flood protection gap” vary widely among experts, but illustrations worth noting include:

  • Less than 25 percent of buildings inundated by Hurricanes Harvey, Sandy, and Irma had flood coverage;
  • Inland areas hardest hit by the remnants of Hurricane Ida in 2021 were in areas in which less than 2 percent of properties had federal flood insurance;
  • In 2022, historic flooding in and around Yellowstone National Park affected areas in which only 3 percent of residents have federal flood insurance; and
  • More recently, precipitation from atmospheric rivers affecting the U.S. West Coast has resulted in an unparalleled weather event not experienced in several decades, with much of the activity affecting areas with low flood-insurance purchase rates.

For decades, U.S. insurers considered flood risk “untouchable” because of how hard it is to quantify their risk. As a result, flood is excluded under standard homeowners and renters policies, but coverage is available from FEMA’s National Flood Insurance Program (NFIP) and a growing number of private insurers that have gained confidence in recent years in their ability to underwrite this risk using sophisticated risk modeling.

Consumer research has consistently shown that some of the most common reasons for not buying flood insurance include:

  • An erroneous belief that flood risk is covered under standard homeowners insurance;
  • If the mortgage lender doesn’t require flood insurance, it must not be necessary; and
  • The coverage is too expensive.

The roadmap provides findings and specific recommendations developed by its multidisciplinary team of authors in collaboration with broad and diverse participation of stakeholder group members. The NIBS Committee on Finance, Insurance, and Real Estate (CFIRE) will host a webinar on October 18 to go over these findings and recommendations. In addition, CFIRE chair Dan Kaniewski will be a participant in Triple-I’s November 30 Town Hall: Attacking the Risk Crisis in Washington, D.C.

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Learn More:

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

Shutdown Threat Looms Over U.S. Flood Insurance

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

More Private Insurers Writing Flood Coverage; Consumer Demand Continues to Lag

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

Kentucky Flood Woes Highlight Inland Protection Gap

Inland Flooding Adds a Wrinkle to Protection Gap

Disaster Resilience

How Proposition 103 Worsens Risk Crisis
In California

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California is not the only U.S. state struggling with insurance availability and affordability, but — as described in a new Triple-I Issues Brief — its problems are exacerbated by a three-decades-old legislative measure that severely constrains insurers’ ability to profitably insure property in the state.

Instead of letting insurers use the most current data and advanced modeling technologies to inform pricing, Proposition 103 requires them to price coverage based on historical data alone. It also bars insurers from incorporating the cost of reinsurance into their prices.

Insurers’ underwriting profitability is measured using a “combined ratio” that represents the difference between claims and expenses insurers pay and the premiums they collect. A ratio below 100 represents an underwriting profit, and one above 100 represents a loss. 

As the chart shows, insurers have earned healthy underwriting profits on their homeowners business in all but two of the 10 years between 2013 and 2022. However, the claims and expenses paid in 2017 and 2018 – due largely to wildfire-related losses – were so extreme that the average combined ratio for the period was 108.1.

Underwriting profitability matters because that is where the money comes from to maintain “policyholder surplus” – the funds insurers set aside to ensure that they can pay future claims. Integral to maintaining policyholder surplus is risk-based pricing, which means aligning underwriting and pricing with the cost of the risk being covered. Insurers hire teams of actuaries and data scientists to make sure pricing is tightly aligned with risk, and state regulators and lawmakers closely scrutinize insurers to make sure pricing is fair to policyholders.

To accurately underwrite and price coverage, insurers must be able to set premium rates prospectively. As shown above, one or two years that include major catastrophes can wipe out several years of underwriting profits – thereby contributing to the depletion of policyholder surplus if rates are not raised.

California is a large and potentially profitable market in which insurers want to do business, but current loss trends and the constraints of Proposition 103 have caused several to reassess their appetite for writing coverage in the state. Wildfire losses, combined with events like early 2023’s anomalous rains and, more recently, Hurricane Hilary, increase the urgency for California to continue investing in risk reduction and resilience. The state also needs to update its regulatory regime to remove impediments to underwriting.

An effort in the state legislature to rectify some of the issues making California less attractive to insurers failed in September 2023. With fewer private insurance options available, more Californians are resorting to the state’s FAIR plan, which offers less coverage for a higher premium.

Want to know more about the risk crisis and how insurers are working to address it? Check out Triple-I’s upcoming Town Hall, “Attacking the Risk Crisis,” which will be held Nov. 30 in Washington, D.C.

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Cyber Risk, Disaster Resilience, Earthquakes, Floods, Highway Safety, Insurers and the Economy, Terrorism Risk

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

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Ten states – Louisiana, Florida, Idaho, Kentucky, Mississippi, Montana, North Dakota, South Carolina, Texas, and Virginia – as well as additional plaintiffs, are suing the Federal Emergency Management Agency (FEMA) over its new methodology for pricing flood insurance, Risk Rating 2.0. On Sept. 14, a federal hearing lasted six hours as the plaintiffs sought a preliminary injunction to halt the new pricing regime while the lawsuit plays out.

Many residents of these states are understandably upset about seeing their flood insurance premium rates rise under the new approach. There may not be much comfort for them in knowing that the current system is much fairer than the previous one, in which higher-risk homeowners subsidized those with lower risks. Similarly, policyholders who have had their premium rates reduced under Risk Rating 2.0 are unlikely to take to the streets in celebration.

These homeowners aren’t alone in seeing insurance rates rise – or even having to struggle to obtain insurance. And these difficulties aren’t confined to holders of flood insurance policies. Florida and California are two states in which insurers have been forced to rethink their risk appetite – due in part to rising natural catastrophe losses and in part to regulatory and litigation environments that make it increasingly difficult for insurers to profitably write coverage.

Even before the COVID-19 pandemic and Russia’s invasion of Ukraine – and the supply-chain and inflationary pressures they created – the property/casualty insurance market was hardening as insurers adjusted their pricing and their risk appetites to keep pace with conditions that were driving losses up and eroding underwriting profitability – topics Triple-I has written about extensively (see a partial list below).

“Rising insurance rates are not the problem,” says Dale Porfilio, chief insurance officer at Triple-I. “They are a symptom of rising losses related to a range of factors, from climate and population trends to post-pandemic driving behaviors and surging cybercrime to antiquated policies, outdated building codes, fraud, and legal system abuse.”

In short, we are not experiencing an “insurance crisis,” as many media outlets tend to describe the current state of the market; we are experiencing a risk crisis. And even as the states referenced above push back against much-needed flood insurance reform, legislators in several states have been pushing measures that would restrict insurers’ ability to price coverage accurately and fairly – rather than addressing the underlying perils and forces aggravating them.  

Triple-I, its members, and a range of partners are working to educate stakeholders and decisionmakers and promote pre-emptive risk mitigation and investment in resilience. We are using our position as thought leaders and our unique non-lobbying role in the insurance industry to reach across sector boundaries and drive constructive action. You will be hearing more about these efforts over the next few months.

The success of these efforts will require a collective understanding among stakeholders and decisionmakers that for insurance to be available and affordable frequency and severity of risk must be measurably reduced. This will require highly focused, integrated projects and programs – many of them at the community level – in which all stakeholders (co-beneficiaries of these efforts) will share responsibility.

Want to know more about the risk crisis and how insurers are working to address it? Check out Triple-I’s upcoming Town Hall, “Attacking the Risk Crisis,” which will be held Nov. 30 in Washington, D.C.

Learn More:

Shutdown Threat Looms Over U.S. Flood Insurance

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

More Private Insurers Writing Flood Coverage; Consumer Demand Continues to Lag

Shift in Hurricane Season’s Predicted Severity Highlights Need for Prospective Cat Risk Pricing

California Needs to Make Changes to Address Its Climate Risk Crisis

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

IRC Outlines Florida’s Auto Insurance Affordability Problems

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

Matching Price to Peril Helps Keep Insurance Available & Affordable

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

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

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

Disaster Resilience, Floods, Insurers and the Economy

Shutdown Threat Looms Over U.S. Flood Insurance

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Even as the 2023 Atlantic hurricane season proves to be more intense than originally predicted, federal funding for the National Flood Insurance Program (NFIP) is threatened by a potential government shutdown. Funding for NFIP will expire after September 30 if lawmakers don’t reach a deal.

Claims on existing policies would still get paid if NFIP isn’t reauthorized. But the program would be unable to issue new policies and would face other funding constraints. If it can’t issue new policies, thousands of real estate transactions requiring flood coverage could be derailed. 

Insured losses from hurricanes have risen over just the past 15 years. When adjusted for inflation, nine of the 10 costliest hurricanes in U.S. history have struck since 2005. This is due in large part to the fact that more people have been moving into harm’s way since the 1940s, and Census Bureau data show that homes being built are bigger and more expensive than before. Bigger homes filled with more valuables means bigger claims when a flood occurs – a situation exacerbated by continuing replacement cost inflation.

Flooding isn’t just a problem for East and Gulf Coast communities. Inland flooding also is on the rise. In August 2021, Hurricane Ida brought heavy flooding to the Louisiana coast before delivering so much water to the northeast that Philadelphia and New York City saw flooded subway stations days after the storm passed. Floods in Eastern Kentucky in 2022 further underscored the need for more comprehensive planning on how to deal with these disasters and reduce the nationwide flood protection gap. California and the Pacific Northwest have been hit in recent years by drenching “atmospheric rivers” and, most recently, Hurricane Hilary, which slammed Southern California and neighboring Nevada, where it turned the Burning Man festival in the state’s northern desert into a dangerous mess of foot-deep mud and limited supplies.

Flood insurance is provided by NFIP and a small but growing number of private insurers, who have become increasingly comfortable writing the coverage since the advent of sophisticated modeling and analytical tools. Between 2016 and 2022, the total flood market grew 24 percent – from $3.29 billion in direct premiums written (DPW) to $4.09 billion – with 77 private companies writing 32.1 percent of the business.

Flood risk was long considered untouchable by private insurers, which is a large part of the reason the federally run NFIP exists. While private participation in the flood market is growing, NFIP remains a critical source of protection for this growing and underinsured peril.

Want to know more about the risk crisis and how insurers are working to address it? Check out Triple-I’s upcoming Town Hall, “Attacking the Risk Crisis,” which will be held Nov. 30 in Washington, D.C.

Learn More:

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

More Private Insurers Writing Flood Coverage; Consumer Demand Continues to Lag

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

Kentucky Flood Woes Highlight Inland Protection Gap

Inland Flooding Adds a Wrinkle to Protection Gap

State of the Risk Issues Brief: Flood

State of the Risk Issues Brief: Hurricanes

Auto Insurance, Highway Safety

Michigan Drivers Benefit From No-Fault Reforms; Rulings Constrain Gains

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By Max Dorfman, Research Writer, Triple-I

The success of Michigan’s no-fault insurance reforms at reining in claims and contributing to premium reductions for many drivers has been crimped by adverse court decisions in cases contesting the reforms and other factors, according to new research by two Triple-I non-resident scholars. 

Michigan can be viewed as “an experiment on both the promises and pitfalls of a grand vision for no-fault auto insurance,” say the authors, Patricia Born, Ph.D. of Florida State University and Robert Klein, Ph.D. of Temple University.  The policy brief, No-Fault Auto Insurance Reform in Michigan: An Initial Assessment Revised, updates prior research by the scholars. It evaluates the reforms and finds that – in addition to reduced claims and beneficial effects on many drivers’ premiums — “it also appears that the number of uninsured drivers has fallen significantly.”

Michigan’s high auto insurance premiums contributed to a large percentage of uninsured drivers. In fact, Michigan was estimated to have the second-highest percentage of uninsured drivers among the states in 2019, at nearly 26 percent.

“This motivated the state’s Governor and Legislature to significantly reform its no-fault law and revise its regulation of auto insurance,” the report says. “The reforms were enacted in 2019 and were phased in from 2019 through 2021. While these reforms and regulatory changes are relatively nascent, there is considerable interest in knowing their effects, including the consequences of eliminating unlimited medical benefits, instituting medical cost controls, and tightening auto insurance rate regulation.”

PIP costs in the state had previously caused skyrocketing premiums due to the high medical costs associated with this coverage. The researchers’ data demonstrates that PIP claims costs dropped significantly because of these reforms.

Additionally, Michigan’s verbal threshold for liability claims appears to have reduced auto insurance costs and premiums in Michigan relative to other states. However, these savings were engulfed by its high PIP costs prior to the reforms. With PIP costs decreasing, the overall cost of liability coverage has also declined.

Now, the number of uninsured drivers has also fallen as auto insurance has become more affordable due to the reforms. Overall, Michigan’s average auto insurance premium for all coverages dropped from $2,611 in 2019 to $2,112 in 2021 – an 18.3 percent decrease. From 2019 to the first quarter of 2023, the average liability premium declined from $825 to $629 – a 23.8 percent decrease. The average loss cost for PIP in Michigan fell almost 40 percent, from $465 in 2019 to $280 in 2023.

Despite these benefits, the paper says, “There are stakeholders who question whether the reforms have created a better system and are seeking to reverse or modify some of them.”

According to the study, some drivers expected greater premium savings than they have received.  Other parties who benefited from the old system (for example, medical providers and trial attorneys) “are seeking to reverse or temper at least some of the reforms that were enacted,” the paper says.

PIP claims costs have begun to rise within the last year due to recent adverse court rulings, as well as other factors, such as more frequent auto accidents.

Learn More:

Michigan No-Fault Reform Yields Fewer Claims, Lower Premiums

Despite Fewer Claims, Personal Auto Insurance Payouts Increase

Insurance Industry

IRC: Consumers Deem
Most Rating Factors Fair

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By Max Dorfman, Research Writer, Triple-I

Most consumers believe the majority of personal insurance rating factors that insurers use to underwrite and price homeowners and auto coverage are fair, according to a new survey by the Insurance Research Council (IRC) – like Triple-I, an affiliate of The Institutes.

But there was some variation regarding which variables they consider fair.

Overall, consumers were more favorable toward factors they perceived to be directly related to the risk of the insured property (condition of the home, cost of rebuilding, miles driven, vehicle information, etc.). They were less likely to rank fair on aspects connected to the insured’s personal profile.

The study, Public Perceptions Regarding the Fairness of Insurance Rating Factors, focused on homeowners and personal auto insurance. IRC found that all 19 homeowners insurance rating factors were assessed to be fair by most respondents, and the majority deemed 10 of the 14 personal auto factors.

Insurance companies use statistically predictive rating variables to assess risk and determine policy prices, helping to accurately align premiums with risk and offer coverage to higher-risk consumers. The variables consider several socioeconomic factors to determine these coverage costs, including gender, age, education, and credit-based insurance scores.

“Given how inflation and other factors have driven up the cost of auto and homeowners insurance in recent years, IRC was not surprised to learn that paying for these essential coverages has been a financial burden for a sizable number of Americans,” said IRC president and Triple-I chief insurance officer Dale Porfilio.  “Yet, at the same time, consumers expressed widespread support in our survey for the fairness of the rating factors used by insurance carriers to price their auto and homeowners policies.”

Among personal auto factors, those most likely to be deemed fair included:

  • Traffic conviction record;
  • Driver’s loss/claim history; and
  • Driving behavior data from telematics.

However, the personal auto factors that were least likely to be considered fair were:

  • Education level;
  • Marital status; and
  • Gender of the driver.

Concerning homeowners insurance, the most fair factors included:

  • The use of safety systems
  • Condition of home; and
  • The estimated cost of rebuilding.

Least agreeable factors for homeowners involved:

  • Credit history;
  • Condition of surrounding building; and
  • The data from a connected device.

Previous IRC research that focused on consumer attitudes about the use of credit history as an insurance rating factor found that skepticism about the link between credit and future insurance claims declines when the predictive power of credit-based insurance scores is explained to them.

Disaster Resilience

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

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Data is at the core of risk management, and the National Association of Insurance Commissioners (NAIC) is seeking to identify gaps in the data state regulators collect from insurers – particularly with respect to understanding insurance availability and affordability.

“The increasing frequency and severity of weather events, rising reinsurance costs, and inflationary pressures are making property insurance availability and affordability more challenging for a growing number of regions across the U.S.,” the NAIC said in a statement during its Summer National Meeting in August. “These dynamics can vary within a relatively small geographic area, so while a state’s property insurance market may be generally healthy overall, there can be localized protection gaps that challenge certain communities.”

The NAIC said states may lack the kind of data needed to gauge the availability and affordability of insurance for consumers. Under Alan McClain, Arkansas insurance commissioner and chair of the NAIC Property and Casualty Committee, insurance regulators of at least 30 states have started work to identify where data is lacking. The plan is to develop a data template to establish “a long-term, robust data collection strategy to help regulators more nimbly respond to inquiries related to their property markets versus a one-time data call.”

This approach contrasts with one proposed last year by the U.S. Treasury’s Federal Insurance Office (FIO). In its request for information (RFI), FIO proposed collecting data related to “insurers’ underwriting metrics and related insurance policy information.”  It said the data “is needed in order for FIO to identify and more accurately assess the financial impact of weather-related events on insurers’ exposures and underwriting over time. FIO’s analysis would assess insurance availability and its effects on policyholders, particularly in regions of the country with the potential for major disruptions of private insurance coverage due to climate-related disasters.”

Triple-I responded to the FIO RFI by saying, in part, that:

  • The proposed call was duplicative and would ultimately hurt the people FIO wants to help;
  • The ZIP Code-level data FIO said it was seeking could lead to misleading conclusions; and
  • FIO could secure the information it needs from existing, publicly available data without placing an additional reporting burden on insurers.

Triple-I provided an extensive but not exhaustive list of resources for FIO to consider.

“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 databases from public sources, not insurer data calls. “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.”

NAIC’s response to the RFI emphasized the importance of collaboration to address concerns about insurance availability and affordability and expressed displeasure at what it characterized as FIO’s “unilateral process.”

“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.”

In a June 2023 report, FIO references the RFI and describes the proposed data call, stating that the comment period closed in December 2022 and that FIO is “assessing next steps.” The June report recognizes and commends the industry’s and the NAIC’s efforts to date but goes on to say that these efforts “are fragmented across states and limited in several critical ways.”

FIO makes 20 recommendations, and the report provides context for each, highlighting efforts already under way and explaining how implementation of the FIO recommendations could improve management and supervision of climate-related risks. It also proposes areas of focus for future work by state insurance regulators and the NAIC.

Learn More:

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

Federal Insurance Office (FIO) request for information (RFI)

Triple-I response to FIO RFI

Corporate Social Responsibility, Disaster Resilience, ESG, Risk Management

How Liberty Mutual Foundation BringsRisk ManagementInto Communities

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By Max Dorfman, Research Writer, Triple-I

Nature-based solutions, green jobs, and resilient infrastructure are at the core of Liberty Mutual Foundation’s approach to helping marginalized communities that are most vulnerable to climate-related perils.

“We believe investing philanthropically in communities to help them mitigate and adapt to the impact of climate change is a natural extension that we do as a property-casualty insurer and an area where we can offer a lot of expertise,” Foundation President Melissa MacDonnell told Triple-I CEO Sean Kevelighan in a recent Triple-I Executive Exchange.

MacDonnell described the foundation’s three-pronged approach to community giving, which consists of:

  • Nature-based solutions, such as increasing access to locally grown food and green space to protect communities from sea-level rise or flooding;
  • Green jobs that provide training and skill development in the green economy for low-income and underrepresented youth and young adults; and
  • Resilient infrastructure for low-income neighborhoods and communities of color.

The foundation also supports existing partners in advancing their climate resiliency goals.

“Any organization in our philanthropic portfolio is eligible for these grants, so they can step back and consider how climate is impacting them,” MacDonnell said. “This includes homelessness shelters and job programs. This is our way of acknowledging that climate affects all of us.”

Kevelighan noted that this holistic approach is particularly important for residents of vulnerable communities.

“We’ve been talking at Triple-I about the role everyone plays in climate,” he said. “It’s encouraging that you’re bringing risk management into communities – particularly those that can’t provide themselves enough resources.”

Kevelighan and MacDonnell discussed how other insurers can become more involved in helping vulnerable communities.

“Insurers should carve out the time to listen to the communities” MacDonnell said. “Partnering with communities and public officials is also important. We are at an incredible moment in time where federal funding is available for climate projects” as a result of measures like the Community Disaster Resilience Zones Act of 2022, which aims to build disaster resilience by identifying disadvantaged communities that are most at risk to natural disasters and providing funding for projects that mitigate those risks.

Cyber Risk, Technology

Keep It Simple:Security System Complexity Correlates With Breach Costs

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By Max Dorfman, Research Writer, Triple-I

Artificial intelligence is helping to limit the costs associated with data breaches, a recent study by IBM and the Ponemon Institute found. While these costs continue to rise, they are increasing more slowly for some organizations – in particular, those using less-complex, more-automated security systems.

According to the study, the average cost of a data breach was $4.45 million in 2023, a 2.3 percent increase from the 2022 cost of $4.35 million. The 2023 figure represents a 15.3 percent increase from 2020, when the average breach was $3.86 million.

However, not all organizations surveyed by the study experienced the same kinds of breaches – or the same costs. Organizations with “low or no security system complexity” – systems in which it is easier to identify and manage threats – experienced far smaller losses than those with high system complexity. The average 2023 breach cost $3.84 million for the former and a staggering $5.28 million for the latter. For organizations with high system complexity, this is an increase of more than 31 percent from the year before, amounting to an average of $1.44 million.

As David W. Viel, founder and CEO of Cognoscenti Systems, put it: “The size and complexity of a system directly results in a greater number of defects and resulting vulnerabilities as these quantities grow. On the other hand, the number of defects and cybersecurity vulnerabilities shrinks as the system or component is made smaller and simpler. This strongly suggests that designs and implementations that are small and simple should be very much favored over large and complex if effective cybersecurity is to be obtained.”

The research also noted that organizations that involve law enforcement in ransomware attacks experienced lower costs. The 37 percent of survey respondents that did not contact law enforcement paid 9.6 percent more than those that did, with the breach lasting an average of 33 days longer than those that did contact law enforcement. These longer breaches tended to cost organizations far more, with breaches with identification and containment times under 200 days averaging $3.93 million, and those over 200 days costing $4.95 million.

AI and automation are proving key

Security AI and automation both showed to be significant factors in lowering costs and reducing time to identify and contain breaches, with organizations utilizing these tools reporting 108-day shorter times to contain the breach, and $1.76 million lower data breach costs relative to organizations that did not use these tools. Organizations with no use of security AI and automation experienced an average of $5.36 million in data breach costs, 18.6 percent more than the average 2023 cost of a data breach.

Now, most respondents are using some level of these tools, with a full 61 percent using AI and automation. However, only 28 percent of respondents extensively used these tools in their cybersecurity processes, and 33 percent had limited use. The study noted that this means almost 40 percent of respondents rely only on manual inputs in their security operations.

Cyber insurance demand is growing

A recent study by global insurance brokerage Gallagher showed that the vast majority of business owners in U.S. – 74 percent – expressed extreme or very high concern about the impact of cyberattacks on their businesses. Indeed, a study by MarketsandMarkets found that the cyber insurance market is projected to grow from $10.3 billion in 2023 to $17.6 billion by 2028, noting that the rise in threats like data breaches, ransomware, and phishing attacks is driving demand.

Organizations are now responding more thoroughly to these threats, with increased underwriting rigor helping clients progress in cyber maturity, according to Aon’s 2023 Cyber Resilience Report. Aon states that several cybersecurity factors, including data security, application security, remote work, access control, and endpoint and systems security – all of which experienced the greatest improvement among Aon’s clients – must be continually monitored and evaluated, particularly for evolving threats.

Insurers and their customers need to work together to more fully address the risks and damages associated with cyberattacks as these threats continue to grow and businesses rely ever more heavily on technology.

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