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Cyber Risk

Despite Warnings,Weak Password Policies Still Invite Cybercrime

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By Max Dorfman, Research Writer, Triple-I

It’s Cyber Security 101: Multi-factor authentication and hard-to-crack passwords are table stakes for preventing incursions.

Nevertheless, “Password,” “12345”, and “Qwerty123” are among the most commonly found passwords leaked on the dark web by hackers, according to mobile security firm Lookout. And, despite the amount of attention the issue receives, the situation does not appear to be improving.

A survey by EY, a consulting firm based in the United Kingdom, found that only 48 percent of government and public sector respondents said they are “very confident in their ability to use strong passwords at work.” The problem is exemplified by a recent study by the U.S. Office of Inspector General – part of the Department of the Interior (DOI), the agency responsible for managing federal lands and natural resources.

Hacking DOI, it turns out, is relatively easy.

In fewer than two hours – and spending only $15,000 – the Inspector General’s Office was able to procure “clear-text” (non-encrypted) passwords for 16 percent of user accounts. In total, 18,174 of 85,944 – 21 percent of active user passwords – were hacked, including 288 accounts with elevated privileges and 362 accounts of senior U.S. government employees.

Much of this issue, according to the report, stems from a lack of multifactor authentication, as well as password complexity requirements that allowed unrelated staff to use the same weak passwords. The Inspector General’s Office found that:

  • DOI did not consistently implement multifactor authentication;
  • Password complexity requirements were outdated and ineffective; and
  • The department did not timely disable inactive accounts or enforce password age limits, which left more than 6,000 additional active accounts vulnerable to attack.

The most commonly reused password was used on 478 unique active accounts. Investigators found that five of the 10 most-reused passwords at DOI included a variation of “password” combined with “1234”.

Simple passwords make hacking easy

With the average person having over 100 different online accounts with passwords, reusing passwords is understandable – but simple passwords make it easy for hackers to access personal data and accounts.

“Compromised, weak and reused passwords still account for the majority of hacking-related data breaches and are one of the top risk issues for most enterprises” said Gaurav Banga, CEO and founder of cybersecurity firm Balbix. In 2020, Balbix found that 99 percent of enterprise users recycle passwords across work accounts or between work and personal accounts.

A growing peril

“The cost of ransomware attacks has increased as criminals have targeted larger companies, supply chains and critical infrastructure,” Allianz says in its Allianz’s 2023 Risk Barometer. “In April 2022, an attack impacted around 30 institutions of the government of Costa Rica, crippling the territory for two months.”

The global insurer goes on to say, “Double and triple extortion attacks are now the norm…. Sensitive data is increasingly stolen and used as a leverage for extortion demands to business partners, suppliers, or customers.”

Part of this growth is due to the rise of “ransomware as a service” – a subscription-based business model that enables affiliates to use existing ransomware tools to execute attacks. Based on the “software as a service” model, it helps bad actors attack their targets without having to know how to code or hire unscrupulous programmers.

Shifting targets

Michael Menapace, an insurance attorney with Wiggin and Dana LLP and a Triple-I Non-resident Scholar, told attendees at Triple-I’s 2022 Joint Industry Forum that “ransomware as a business model remains alive and well.”

What has changed in recent years, he said, is that “where bad actors would encrypt your systems and extract a ransom to give you back your data, now they will exfiltrate your data and threaten to go public with it.”

The types of targets also have changed, Menapace said, with an increased focus on “softer targets—in particular, municipalities” that often don’t have the personnel or finances to maintain the same cyber hygiene as large corporate entities.

Organizations and individuals must take the threat of cyberattacks seriously and do as much as possible to reduce their risk. Improved cyber hygiene policies and practices are a necessary first step.

Industry Financials, Insurance Industry, Insurers and the Economy

Monetary Policy Drives Economic Prospects; Geopolitics Limits Inflation Improvement

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

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

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

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

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

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

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

Auto Insurance, Theft

Catalytic Converter Thefts Up, SpurringLawmakers to Act

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By Max Dorfman, Research Writer, Triple-I

Rising thefts of catalytic converters – driven, at least in part, by increased black-market prices for the motor vehicle pollution-control component – have prompted renewed state and federal focus on stopping these crimes.

Converter thefts rose in 2021, with 52,206 reported, up from 1,298 in 2018, according to claims data from the National Insurance Crime Bureau (NICB). Catalytic converters are part of a vehicle’s exhaust system, reducing toxic gas and pollutants and turning them into safe emissions. Though the part itself is valuable—sometimes rising above $1,000 each on the black-market—the precious metals inside can be more valuable than gold. They include palladium, platinum, and rhodium, the latter of which is valued at $20,000 per ounce.

The NICB has found a strong link between “times of crisis, limited resources, and disruption of the supply chain that drives these thefts.”

In late 2022, the U.S. Department of Justice, alongside federal, state, and local law enforcement partners, broke up a network of thieves, dealers, and processors involved in selling stolen catalytic converters to a metal refinery for tens of millions of dollars. The ring spanned nine states, from California to Virginia. The United States is now pursuing forfeiture of $545 million connected to the case.

“This national network of criminals hurt victims across the country,” said FBI Director Christopher Wray. “They made hundreds of millions of dollars in the process—on the backs of thousands of innocent car owners.”

Lawmakers take notice

In 2021, 26 states across the U.S. proposed bills to limit the theft of catalytic converters. Stringent laws in Arkansas, South Carolina, and Texas require scrap metal buyers to maintain records of catalytic converter purchases. In Minnesota, a Catalytic Converter Theft Prevention Program was created for investigation and prosecution of this crime.

More recently, U.S. Rep. Jim Baird of Indiana introduced a federal “Preventing Auto Recycling Theft Act,” which would help law enforcement address these thefts by marking each converter with a traceable identification number and establishing federal penalties.

“Whoever steals or knowingly and unlawfully takes, carries away, or conceals a catalytic converter from another person’s motor vehicle, or knowingly purchases such a catalytic converter, with the intent to distribute, sell, or dispose of such catalytic converter or any precious metal removed therefrom in interstate or foreign commerce shall be fined under this title or imprisoned not more than 5 years, or both,” the legislation says.

Companion legislation has been introduced in the Senate by Sen. Amy Klobuchar of Minnesota and Ron Wyden of Oregon.

Preventive measures can be taken

The NICB recommends several steps to protect yourself from catalytic converter thefts:

  • Install a catalytic converter anti-theft device.
  • Park fleet trucks in an enclosed area that is secured, well lighted, locked and alarmed. 
  • Park personal vehicles, if possible, in a garage. If not possible and the vehicle must be parked in a driveway, consider installing motion sensor security lights. Whether in the garage or outside in the driveway, set the alarm on your vehicle if equipped.
  • Attend a local NICB catalytic converter etching event. If none are currently scheduled in your area, contact a muffler shop that can etch your vehicle’s VIN on the converter, and spray it with a highly visible high-heat paint.

The NICB notes that these thefts can be covered by insurance under the optional comprehensive portion of your insurance policy, which provides coverage for damage to your vehicle not caused by a collision.

Insurance Industry, Insurers and the Economy, Regulation

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

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

In response to a request for comments on the proposed data call, Triple-I has told FIO that the requested data would be duplicative, could lead to misleading conclusions, and – by increasing insurers’ operational costs – would ultimately lead to higher premium rates for policyholders.

“Fulfilling this new mandate would require insurers to pull existing staff from the work they already are doing or hire staff to do the new work, increasing their operational costs,” Triple-I wrote. “As FIO well knows, state-by-state regulation prevents insurers from ‘tweaking’ their cash flows in response to change the way more lightly regulated industries can. Higher costs inevitably drive increases in policyholder premium rates.”

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

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

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

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

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

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

“While we recognize the Treasury’s desire to better understand the impact of climate risk and weather-related exposures on the availability and affordability of the homeowners’ insurance market,” NAIC wrote, “we are disappointed and concerned that Treasury chose not to engage insurance regulators in a credible exercise to identify data elements gathered by either the industry or the regulatory community.”

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

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

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

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

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

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

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

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

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

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

JIF-Related Blog Posts:

Leaning Forward into a Changed World

JIF 2022 Climate Panel Focused on Wildfire Risk

Cyber Criminals Shift to Softer Targets and Reputation Threats

Combined Ratio Takes Center Stage

State Farm CEO Talks About the Power and Promise of Mutuality

Florida and Legal System Abuse Highlighted at JIF 2022

Progress And Challenges in Diversity, Equity, and Inclusion

Insurance Industry

A Discussion of Progress and Challenges in Diversity, Equity, and Inclusion at JIF 2022

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By Max Dorfman, Research Writer, Triple-I

At JIF 2022, a panel assembled to discuss the importance of diversity, equity, and inclusion (DEI) in the insurance industry.

Jennifer Kyung, Property & Casualty (P&C) chief underwriter, USAA and Triple-I Chair, moderated the discussion, which focused on a wide array of issues, including the talent gap.

“We need to put a focus on talent in the insurance industry, and make sure that the talent is diverse,” Kyung stated in her opening. “We have hundreds of thousands of jobs that we need to fill, and we need to fill those with people who have the best skill sets.”

For Roosevelt C. Mosley Jr., principal and consulting actuary, Pinnacle Actuarial Resources, the approach to DEI has a significant impact. Mosley noted that it is a sensitive issue, with people having different interpretations.

“We all have differences,” Mosley said. “But we have to recognize that we’re different, and if we’re going to serve diverse communities, we need to be diverse, too.”

“Bringing more diverse talent to the industry is good, but that’s not enough,” Mosley added. “They need to feel included. We haven’t completed the process if they don’t feel included.”

For Traci Adedeji, president-elect, CPCU Society, “diversity is differences that exist whether we choose to call them out or not.”

“A DEI strategy really has to be baked into the DNA of an organization,” Adedeji said. “It’s what you want your culture to be.”

Adedeji added that equity and inclusion necessitate intentional actions within an organization.

“When I think of DEI, it’s about considering all the key stakeholders,” said John Tribble, vice president, Agency Operations and Business Development, Church Mutual. “When I think about diversity, it’s simple: does the leadership have the foresight and willingness to step into situations that are uncomfortable for them?”

Tribble added that if one company does not strive for this, a competitor will do it, leading to a loss in market share.

For Rebekah Ratliff, mediator, arbitrator, neutral evaluator and settlement master, JAMS, there is an extra step in the DEI equation.

“The belonging piece to DEI is inviting people to bring their gifts and talents, understanding that it will make the experience richer for everyone,” Ratliff said. “Research shows it’s a business imperative to have diverse thinkers, participants, people from different cultures, backgrounds, and experiences.”

Ratliff furthered the point, saying, “It’s about examining, assessing, and revamping cultures to utilize people in the right spaces, people from underutilized communities. It’s not just about the faces but putting people in the right positions.”

The panelists agreed that this process has to come from the highest echelons of the company. Mandates and incentives, they said, are a necessary part of this.

The question, Kyung posed, is how the insurance industry is doing with DEI compared to other industries, and where further progress can be made.

“Company culture has to be examined,” Ratliff said. “We have to be truthful about the deficiencies and barriers to entry. 400,000 jobs are coming open. Companies are spending millions of dollars replacing technology, but they’re not willing to spend money on the biggest risk: people. People are our biggest asset and our biggest risk.”

“Our work is incomplete,” Mosley said. “I say that because, with 30 years of experience, the industry looks vastly different, but sometimes progress has been slow and difficult.”

“We are doing better but we’re not there,” Adedeji said. “The fact that we’re in this room having this conversation is progress. It’s important to bring in diverse talent, but if the leadership doesn’t lead to mentorship, sponsorship and bubbling up to senior levels of the organization, then we’re being disingenuous.”

Tribble concluded, “A lot of us aren’t comfortable with being uncomfortable.”

Industry Awards & Events, Insurance Industry, Legal Environment

Florida and Legal System Abuse Highlighted at JIF 2022

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By Max Dorfman, Research Writer, Triple-I

Florida took center stage at JIF 2022, as a group of panelists discussed growing courtroom costs and the rise of legal system abuse.

“Legal system abuse is a combination of factors, including social inflation, nuclear verdicts, third party litigation funding, tort reform pullback, cost shifting schemes, and attorney advertising,” opened Ronna Ruppelt, CEO of CLM & Claims Pages, who served as moderator.

Ruppelt added, “Florida is the poster child for legal system abuse.”

The panel analyzed the general landscape of these issues, and how Florida became the epicenter of many of these issues.

They noted that in Florida, roof and windshield claims are part of this cottage industry, driven by plaintiff fee recoveries more than the subject of the litigation itself. The costs of roofs have dramatically increased even in the past three years. This is not primarily driven by disasters.

“In 2021, Florida had 116,000 property insurance lawsuits pending,” Ruppelt said. “The state is on pace for approximately 130,000 in 2022.” 

Most states only have a few hundred. California, the most populous state in the U.S., had a mere 3,500 property insurance lawsuits pending in 2021.

“The numbers highlighted are staggering,” said Fred Karlinsky, shareholder and global co-chair of Greenberg Traurig, LLP. “It’s been recognized at the highest levels of state government.”

With the recent gubernatorial election in Florida, this problem has only become more visible. Incumbent Ron DeSantis and his challenger (and former governor of Florida) Charlie Crist debated over the costs of roof replacement, as well as litigation over home insurance.

“There may be a $10,000 judgement award, but millions of dollars of fees,” Karlinsky said.

Indeed, the property insurance market has become similar to health care, with assignment of benefits (AOBs)—in which an insured signs their benefits over to the medical provider—getting paid by insurers.  AOBs utilize unscrupulous contractors that come in before the insurers, and “make your home a disaster zone.”

“The insurers have no way to know what the damage was, and now they have to fight these claims,” Karlinsky added, noting that once the insurer enters the court system, it often results in nuclear verdicts.

“Florida is tougher for adjusters,” mentioned Joseph Blanco, the president of Crawford & Company. “After we confirmed up for Hurricane Irma, there have been billboards all over the place saying don’t believe adjusters.” 

Attacking the credibility of adjusters, Blanco said, makes it very difficult for insurers. This only adds to unrealistic expectations for claims, making it more challenging to settle pre-litigation.

Though the panel recognized this kind of legal abuse began in the 80’s and experienced upward trends in the 90’s and early 2000’s, there were calls at the time for nationwide tort reform. However, the lawyers involved in these suits have become more sophisticated, making it even more challenging to confront this issue.

“The lawyers involved identify a theory of liability, find litigation funders, create advertisements, and then they go forum shopping,” said Harold H. Kim, the president of the Institute for Legal Reform, and the chief legal officer and executive vice president of the U.S. Chamber of Commerce. “They roll the dice to see if they can achieve a settlement or a nuclear verdict, which shifts the value of negotiations.”

“It’s so pernicious that the corporate community is in the crosshairs,” Kim added. “The stability of the rule of law and the ability to operate a business is critically challenging.”

The panelists agreed that problems surrounding legal abuse are only growing more significant.

“What we have seen is the use of plaintiff attorneys are moving out of Florida to you,” Karlinsky said. “AOBs and the roof phenomena are not just going to be in the large states. We’re seeing them all over the place. The plaintiff’s bar does not have the same restrictions as the insurance industry.”

“What happens in Florida doesn’t stay in Florida,” concluded Kim.

Auto Insurance, Regulation

New Minimum Auto Liability Limits MayCause Consumersto Drop Insurance

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By Max Dorfman, Research Writer, Triple-I

Insurance groups argue that new laws in California and New Jersey that raise the minimum auto liability coverage required for drivers may cause price-sensitive consumers to drop their coverage.

The law in California, signed by Gov. Newsom in October, raises the minimum liability coverage to $30,000 per single injury or death, from $15,000; $60,000 per accident, from $30,000; and $15,000 for property damage, from $5,000. These changes are effective January 1, 2025

The New Jersey law, signed in August 2022 by Gov. Murphy, raises the limits in two steps: first to $25,000 per injury, $50,000 per accident and $25,000 for property damage effective on January 1, 2023 and then to $35,000 per injury and $70,000 per accident on January 1, 2026. Coverage for property damage will remain unchanged for the second increase.

To better understand the impact this will have on insurers and consumers, we sat down with Gary R. La Spisa, II, vice president, Insurance Council of New Jersey, and Janet Ruiz, Triple-I’s director of strategic communications, who specializes in the California insurance landscape.

Why are these laws being passed now?

La Spisa: While the ICNJ understood the need for, and ultimately supported, a move from our current minimums of 15/30/5 to the next currently filed level of 25/50/25 to keep up with average losses, we advocated against imposing a second state-mandated premium increase on drivers with minimum limits.

Ultimately, 1.36 million drivers in New Jersey will face at least one premium hike as a result of the law, at an estimated $130 annual increase. Unfortunately, we cannot estimate the impact of the second hike, as limits of 35/70/25 are not filed in any state. 

Ruiz: We’ve seen medical and repair costs increase dramatically and an increase in accidents and fatalities now that pre-pandemic numbers of drivers are back on the road. While inflation, supply-chain issues and litigation costs are on the rise, we are concerned that this will cause drivers who can’t afford increased limits to drop coverage

What are the consequences of consumers dropping coverage?

La Spisa: Presently, the uninsured motorist rate in New Jersey is estimated to be the lowest in the nation, at 3.1 percent. We are concerned that some drivers will drop coverage, which will push this number up and force carriers to increase rates for uninsured/underinsured motorist coverage.

Ruiz: Consumers who drop coverage risk losing their driver’s license, fines, and inability to register their car with the DMV. California now has the highest number of uninsured drivers in the U.S., estimated at 3.6 to 4.1 million people.

What other effects do you anticipate?

La Spisa: New Jersey law offers a bare bones insurance product, which we refer to as the Basic Policy. We expect that as affordability becomes a greater concern some drivers will opt for this limited product, instead of a full Standard Policy.

Ruiz: California law also offers a bare bones, low-cost auto insurance product, which may get more takers as we face affordability issues for low-income drivers.  The state is expecting fewer underinsured accidents due to the higher limits. We expect to see more drivers in the low-cost auto program and litigation for higher verdict awards for those who have the higher limits.

Do you believe this will have a ripple effect on other states?

La Spisa: Perhaps. The challenge is striking a balance between adequate coverage and affordable premium so to avoid pricing drivers out of insurance all together.

Ruiz: Many states have already increased the minimum liability limits and may not make changes.

How are insurers responding to these price hikes, or planning to?

La Spisa: Most companies already have a 25/50 bodily injury and a $25,000 property damage product filed in New Jersey, so the impact of the first increase on carriers is primarily on the administrative and IT front as they reprogram their systems and renew policyholders with current minimums at the new standard.

For the second increase, carriers will have significant work to do, including determining pricing for this new limit which does not exist anywhere in the country and filing this new product with the Department before rolling it out.

Ruiz: Insurers will adapt to the new law. Many are reluctant, due to the affordability issues for low-income drivers.

What can consumers do to deal with these increased costs?

La Spisa: Consumers should carefully review their policies and always consider shopping around to find the policy which best fits their needs and budget.

Ruiz: We recommend that people shop and compare. Ways to save include choosing higher deductibles, bundling home and auto insurance, or dropping comprehensive or collision insurance on older cars with low value.

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

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

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Photo credit: Don Pollard

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

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

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

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

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

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

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

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

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

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

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

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

JIF 2022: Combined Ratio Takes Center Stage

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Photo credit: Don Pollard

By Max Dorfman, Research Writer, Triple-I

Insurers are expected to post an underwriting loss in 2022, following four years of modest underwriting profits, according to a panel at the Triple-I’s Joint Industry Forum.

The panel was introduced by Paul Lavelle, head of U.S. national accounts for Zurich North America, who noted that the insurance landscape has dramatically changed over the past year.

“The biggest concerns for the world economy are rapid inflation, debt crisis, and the cost of living,” Lavelle said in his opening remarks. “I think that’s why, we as an industry, need to pull this together, and deal with all the variables.”

The panel consisted of Dr. Michel Léonard, Triple-I chief economist and data scientist; Dale Porfilio, Triple-I chief insurance officer; and Jason Kurtz, principal and consulting actuary for actuarial consultant Milliman Inc.

“Inflation overall has gone up and replacement costs have come down,” Léonard said in his initial remarks. “Growth has been challenging because of federal reserve policy that has brought the economy to a halt. Most growth has been disappearing in homeowners, a bit on the commercial real estate side, and on the auto side.”

Porfilio said the rise in loss trends across the insurance industry reveals an underwriting loss, with a projected combined ratio of approximately 105 in 2022. The combined ratio represents the difference between claims and expenses paid and premiums collected by insurers. A combined ratio below 100 represents an underwriting profit, and a ratio above 100 represents a loss.

The 2022 underwriting loss comes after a small underwriting profit from 2018 through 2021, at 99. However, underwriting results are expected to improve as the industry moves forward.

“The results don’t look like the prior years,” Porfilio said. “The core underwriting fundamentals are concerning. However, after a poor result in 2022, we do expect some improvement in 2023 and 2024.”

Still, commercial lines remain relatively successful.

“In the aggregate, commercial lines are relatively outperforming personal lines,” said Kurtz. “That was the case in 2021 and we expect that to be the case in 2022 and through our forecast period of 2024.”

This includes workers compensation, which is closing in on eight years of underwriting profits, according to Kurtz.

On the personal auto line, gains from 2020 have been changed to the biggest losses in two decades.

“Personal auto is very sensitive to supply and demand,” Léonard said. “In the last 24 months, there’s been a historic swing in prices, and particularly the used auto side. It’s all about supply and demand. Those prices increased 30 to 40 percent year-over-year. Recently, though, prices have come down a bit.”

“The industry lived through high profitability in 2020 due to less drivers,” Porfilio added. “Fourteen billion was returned to customers that year.”

However, due to increased driving and reckless driving, the loss ratios have gone up.

The combined ratio in 2021 stood at 101, and in excess of 108 in 2022, according to Porfilio. Still, loss trends are expected to return to normal in 2023 and 2024.

Interest rates have also affected homeowners lines.

“The federal policies have been punishing growth,” Léonard said.

“Underlying loss pressure and Hurricane Ian have created challenging results,” Porfilio added.

However, the hard market has caused growth of 10 percent in 2022, partially due to exposure agreements, as well as rate increases.

The combined ratio for 2022 is expected to be around 115, dropping to approximately 106 in 2023, before an expected decrease to around 104 percent in 2024.

On the commercial auto side, the panelists predict an underwriting profit with a combined ratio of 99 in 2021, but there was a four-point loss in 2022. This is expected to improve in 2023, with a forecast ratio of 102, and 101 in 2024.

On the commercial property lines, the markets are facing shortages of steel, glass, and copper, according to Leonard, with labor challenges contributing to low-to-mid-double-digit percentage time increases to some tasks.

“One of the most important factors in this is labor. It’s very unlikely that labor will go back to where it was,” Léonard said. “We’ve estimated that it will take 30 percent longer for repairs, rebuild, and construction, and five percent in terms of cost.”

However, Kurtz said that the net combined ratio for commercial property markets is projected to be approximately 99.1 in 2022, a small underwriting profit in spite of losses tied to Hurricane Ian. For 2023, the combined ratio is expected to be roughly 94 and 92 in 2024.

“We are anticipating further rate increases and further premium growth,” Kurtz added.

Indeed, insurers continue to adapt to these new challenges. Although 2022 is predicted to result in small losses, the industry continues to evolve.

As Lavelle said in his introduction, “Insurance companies are no longer able just to assess the risk, collect the premium, and pay the loss. We’re being looked at to come up with answers.”

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