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Business Insurance, Business Risk, Insurance Industry, Workers Compensation

Pandemic Fuels Growth in Captive Insurance

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By Max Dorfman, Research Writer

The coronavirus pandemic and the financial challenges it presents have fueled growth in captive insurance – a form of self-insurance in which one or more entities establish their own insurance company. They also may insure the risks of organizations other than their major owners. 

“Wholly owned” captives are set up by large corporations to finance or administer their risk financing needs. If such a captive insures only the risks of its parent or subsidiaries, it is called a “pure” captive.  Multiple companies may also form a “group captive.”

Captive formations nearly doubled in 2020, according to a recent survey by Marsh. The global insurance broker and risk advisor’s survey of more than 1,300 captives also shows that gross written premiums in this area grew from $54 billion in 2019 to nearly $61 billion in 2020.

 In January 2022, the National Collegiate Athletic Association (NCAA) board of governors unanimously approved a $175 million fund to create a captive for event cancellation. With insurers unable to cover risks related to the coronavirus pandemic – which falls under the umbrella of communicable diseases policies – because of the potential for unsustainable costs, the captive structure has become a more popular method to protect from losses.

The NCAA formed its captive after the 2020 NCAA basketball tournament was cancelled due to COVID-19, resulting in a $270 million payout – or about 40 percent of what the 1,200 participating schools would have earned for the tournament. In 2021, the NCAA limited the number of fans at the tournament, with the organization’s coverage allowing it to pay the total $613 million to members last year. However, their coverage for 2022 had expired, and communicable disease coverage was now difficult to find.

“When the NCAA looked to renew coverage for the 2022 tournament, a lot of it was going to look similar,” said John Beam, a broker for Willis Towers Watson, “but there is not coverage for communicable disease right now.”

The sports and entertainment industry experienced losses between $6 billion and $10 billion as the coronavirus pandemic raged on, with premiums in event insurance increasing between 25 percent and 50 percent. For many organizations, captive insurance provides a viable alternative for these risks.

Workers’ comp and captives

The coronavirus pandemic has also affected captive owners in the workers’ compensation field. Indeed, the pandemic, alongside the ensuing “Great Resignation,” during which employers have struggled to retain staff, has made many captive owners potentially more willing to pay workers’ comp claims, according to a panel at the recently held Captive Insurance Companies Association international conference.

Amy O’Brien, vice president of third-party administer sales at Gallagher Bassett Services Inc., a claims service provider, said the initial phases of the pandemic saw many insurers denying COVID-19-related claims. Claims asserting exposure at work were difficult to prove, and many captives questioned if the claims were associated with claimants’ work. Additionally, there were possible regulatory changes that these captives were concerned about.

“With medical costs continuing to rise, the most significant dynamic in terms of any company controlling their workers’ compensation costs and claims is ensuring that there are adequate tools in place to help mitigate medical costs for claimants under their workers’ compensation,” said Dustin Partlow, senior vice president at Caitlin Morgan Insurance Services and an expert in captive insurance solutions.

“But with omicron and the Great Resignation, we’re seeing a change where employers are saying, ‘What can I do to get this person back to work sooner?’” Gallagher’s O’Brien said.

Approximately 90,000 claims were processed by Gallagher Bassett that covered a COVID-19 issue, with over 60 percent of cases closed without payment, frequently due to the fact that there were no related medical expenses, O’Brien said. But the 40 percent that did result in a payment averaged $4,000 per case.

“The employee is more valuable now – so they are being treated right. The employer is saying: ‘What can I do to keep this person?’,” O’Brien added.

ESG, Legal Environment, Regulation, Risk Management

Bringing Clarity
to Concerns About Race
in Insurance Pricing

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There is no place for discrimination in today’s insurance marketplace. In addition to being fundamentally unfair, to discriminate on the basis of race, religion, ethnicity, sexual orientation – or any factor that doesn’t directly affect the risk being insured – would simply be bad business in today’s diverse society.

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 using such data can lead to “proxy discrimination,” with people of color sometimes being charged more than their neighbors for the same coverage. Insurers reply that these tools reliably predict claims and help them match premiums with risks – preventing lower-risk policyholders from subsidizing higher-risk ones.

Public confusion around insurance rating is understandable. The models used to determine insurance rates are complex, and actuaries have to distinguish causal relationships from superficial correlations to appropriately align insurers’ prices with the risks they’re covering. If they get it wrong, the insurers’ ability to keep their promises to pay policyholder claims could be compromised.

And they have to do this while complying with regulations and statutes in 50-plus U.S. jurisdictions. As one of the most heavily regulated industries in the world, insurers have strong incentives to comply with anti-discrimination rules.

To help clarify this complexity, Triple-I has published an Issues Brief on the subject, and the Casualty Actuarial Society has published a series of four research papers, drilling down deep into the topic:

• Defining Discrimination in Insurance

• Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance

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

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

“Insurance pricing is a high-wire act,” CAS says.  “As regulation and society’s understanding of discrimination evolve, however, it is necessary for us to keep abreast of changes in the manner in which discrimination is defined and adjudicated.”

Insurers are well aware of the history of unfair discrimination in financial services. While it would be disingenuous to suggest that all traces of bias have been wrung out of the system, the insurance industry has been responsive over the decades to concerns about fairness and equity. Insurers and actuaries are uniquely positioned to continue helping policymakers, corporate decisionmakers, and the public understand these inequities and to play a constructive role in the policy discussion.

Industry Financials, Insurers and the Economy

Invasion’s Impact on CPI, P/C Replacement Costs

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Russia’s invasion of Ukraine since Feb. 24, combined with persisting supply chain disruptions related to the pandemic, continue to drive inflation as measured by the Consumer Price Index (CPI). From a property/casualty insurance perspective, these forces have a particularly strong impact on replacement costs – especially in the automotive sector.

Total P/C replacement costs represent a weighted average for the homeowners, personal and commercial auto, commercial multi-peril, general liability, and workers compensation lines. Auto replacement costs include new and used vehicles, as well as parts and labor for construction and repair.

Based on the March release of CPI data from the Bureau of Labor Statistics, total P/C replacement costs rose to 16.3 percent in February – up 4.6 percent from 11.8 percent in December. That increase is 3.3 percent greater than Triple-I projected in December, before the invasion began.

While CPI growth is largely being fueled by rising gasoline prices stemming from uncertainty surrounding affairs in Eastern Europe, the key driver of replacement costs is the industry’s exposure to auto prices. New-vehicle price increases only broke double-digits in the fourth quarter of last year; however, used-vehicle price inflation has been above 25 percent in nine of the past 12 months.

“Despite fuel imports from Ukraine and Russia making up only a single-digit percentage of U.S. energy consumption, gasoline prices will likely remain elevated as speculation over OPEC exports, alternative fuel sources for Central Europe, long-term profitability of domestic drilling operations, and rising food-insecurity in fuel exporting counties in the Middle East continue,” said Dr. Michel Léonard, Triple-I’s chief economist and data scientist and head of its Economics and Analytics Department. “At the same time, new vehicle prices can be expected to keep rising as Russian exports of nickel and palladium cease.”

Russian exports of these metals – critical to automotive construction – account for 15 percent and 20 percent, respectively, of the global market.

Dramatic increases in used vehicle prices are common during and after economic corrections and recessions, Léonard said, adding that these elevated prices usually resolve themselves within 24 months of the end of the downturn. Assuming the supply-chain situation improves and the U.S. economy doesn’t slip back into recession, used vehicle price growth is likely to fall back in line with new vehicle inflation over the next 12 months.

Insurance Industry, Life Insurance

Women have come a long way to take hold of their finances. How can the insurance industry further their progress?

By Tasha Williams, Senior Research Writer and Max Dorfman, Research Writer

Women contribute more earnings to their households and feel more confident about personal finance than prior generations. However, they still face hurdles to taking charge of planning for their financial future and legacy.  

Findings from a new report, Lack of Knowledge and Confidence Deter Women from Purchasing Life Insurance, produced by insurance nonprofits LIMRA and Life Happens, indicate a substantial disparity in life insurance purchasing between women and men and perceptions surrounding these products. 

Society historically shut women out of their financial affairs. 

Women did not have the right to open a bank account in their name before the 1960s. Before the Equal Opportunity Credit Act of 1974, banks refused women credit simply for being unmarried. In cases where women were married, banks required the co-signature of the husband. Until the SCOTUS Kirchberg vs. Feenstra decision in 1981, state laws gave men unfettered control over their wives’ assets–even if these were obtained without combined marital resources. 

Women remain underserved by the life insurance industry. 

Over the past five years, the life insurance ownership rate for U.S. women declined 10 points to 47 percent, despite women voicing a greater concern regarding the “financial, physical and mental impact of COVID-19 on them and their families,” according to the report. Indeed, 31 percent of women said they would obtain life insurance coverage in 2021, with 42 percent of men saying they would do the same.  

Some women in the survey said they had anxiety about being dealt with differently by insurance companies and financial professionals and were uneasy about sharing personal information with an agent or company.  

Women still face hurdles to financial planning on equal terms. 

The LIMRA study posits that only 22 percent of women “feel very knowledgeable about life insurance,” compared to 39 percent of men, with 80 percent of women misjudging the cost of life insurance. Researchers found this “undermines women’s confidence in shopping for and purchasing coverage and leads to fear of being taken advantage of, creating a barrier to entry.” 

Data can play a crucial role in understanding how people make decisions, but it needs context. Other research, for example, indicates that societal norms and biases can affect women’s confidence and their propensity to engage in subjects from which they have been historically excluded. Vestiges of the past continue to sustain inequalities: 

When combined with the status of being an equal or primary earner for their household, these hurdles can be amplified as women may consequently have less time to devote to increasing their knowledge and use of financial planning tools, such as insurance. 

Barriers are falling, but there’s opportunity in doing more. 

Throughout history, women have played a significant role in the economy at large and within their families, regardless of whether their contributions were compensated or recognized. Today, lifestyle choices, a divorce, or the death of a partner may position nine out ten women as the sole financial decision-maker in their households. The 2021 Insurance Barometer Study, also conducted by Life Happens and LIMRA, found that 43 percent of women say they need or will need more coverage – a total of 56 million individuals.  

Market opportunity lies in engaging women where they are. Increasing consumer education and accommodating gender-diverse life cycle needs and the associated risks can make this happen. Women represent nearly 60 percent of insurance professionals, but only one in 10 hold leadership positions, roles that drive industry transformation. Pushing ahead with diversity and inclusion goals can lay the groundwork for more innovation and equality.  

Auto Insurance, Corporate Social Responsibility, ESG, Homeowners Insurance, Regulation

Actuaries Tackle Race in Insurance Pricing

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The Casualty Actuarial Society (CAS) has developed a series of papers examining the issue of race and insurance pricing and seeking to contribute constructively to the policy discussion around it.

“Insurance pricing is a high-wire act,” CAS says.  Actuaries have to quantify and differentiate among a massive variety of risk variables while avoiding unfair discrimination. “As regulation and society’s understanding of discrimination evolve, however, it is necessary for us to keep abreast of changes in the manner in which discrimination is defined and adjudicated.”

The CAS research has generated four papers – two published this week, two more to be published on March 31 – that define, quantify, and propose methods for addressing unfair discrimination where it is found to exist.

Confusion around insurance rating is understandable, given the complex predictive models being used today, which can lead to inappropriate comparisons and inaccurate conclusions. Algorithms and machine learning hold great promise for helping to ensure equitable pricing. However, research has shown these tools also can amplify biases that manage to creep into their programming.

Recent Colorado legislation requires insurers to show that their use of external data and complex algorithms don’t discriminate against protected classes, as well as other state and federal efforts to address perceived bias in pricing.

The actuarial discipline and the insurance industry are well positioned to continue helping policymakers and corporate decisionmakers understand and address these inequities.

The CAS papers published this week are:

Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance

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

Disaster Preparedness, Disaster Resilience, Earthquakes, Homeowners Insurance

Earthquakes:You Can’t Predict Them, But You Can Prepare

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By Max Dorfman, Research Writer, Triple-I

“Neither the United States Geological Survey (USGS) nor any other scientists have accurately predicted a major earthquake,” according to a recent post in the California Residential Mitigation Program (CRMP) blog. “And scientists do not expect to be able to predict earthquakes in the future. However, USGS scientists can calculate the probability  that a significant earthquake will occur in a specific area within a certain number of years.”

CRMP is a joint powers authority formed by its members, the California Earthquake Authority and the California Governor’s Office of Emergency Services.

Forecasting earthquakes directly before they occur is not possible – and the risk of a large earthquake remains high. With more than 15,000 known faults in California – more than 500 categorized as “active” – and most Californians living within 30 miles of an active fault, no one in the Golden State is immune to earthquake risk. 

With this in mind, the United States government has been working toward greater quake preparedness. The USGS recently released a report, UCERF3: A New Earthquake Forecast for California’s Complex System,projecting a 93 percent probability of one or more magnitude 6.7 quake or greater hitting Southern California over the  30-year period that began  in 2014. Additionally, the USGS predicts that, over the same period, there is more than a 99 percent chance of at least one magnitude 6.7 or greater earthquakes occurring in all of California.

What can you do to prepare?

ShakeAlert is a tool that helps Californians provide an initial alert concerning an imminent tremor. This early warning system delivers information that on earthquakes moments after it is begun, such as the expected intensity of ground shaking, and warning people who may be affected.

Additionally, retrofitting older homes – particularly those built before 1980, which predate modern seismic building codes – can help create more quake-resistant and resilient residences. Indeed, U.S. Census data found that than 53 percent of the housing units in San Diego County fall into that category.

As wildfires and other climate-related events continue to capture headlines, it’s important that homeowners and businesses in quake-prone areas do not neglect earthquake preparation. Most standard homeowners and renters insurance don’t cover most earthquake damage. However, with the right tools and information, people can better prepare for tremors, keeping themselves and their homes safe.

Auto Insurance, Highway Safety

Reducing Traffic Fatalities and Injuries Through Vision Zero

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By Max Dorfman, Research Writer, Triple-I

Local governments in the United States in recent years have begun adopting “Vision Zero” policies, which aim at cutting roadway fatalities to zero. Such policies – which have demonstrated success abroad – have drawn even more interest since the onset of the pandemic, during which traffic fatalities and injuries have surged.

The Vision Zero Network is a nonprofit focused on helping local governments implement the Vision Zero plan. First implemented in Sweden in 1997, that country has seen its traffic fatalities halved, inspiring other governments to adopt similar measures. Vision Zero is also becoming an initiative for the entire European Union.

More than 40 communities across the United States have adopted these policies, including major metropolitan areas like New York City, Los Angeles, and Portland, Ore. In Portland, several data points are helping government officials better understand how to reduce traffic fatalities and injuries, including a high percentage of pedestrian crashes occurring because of long distances between marked crossings. Portland has taken the initiative, building “a system to protect pedestrians includes frequent safe crossings, street lighting, a cultural acceptance of slower speeds and people educated about how to interact safely on the streets.”

Success in Hoboken, NJ

Hoboken, a city of about 54,000 people across the Hudson River from New York City, has experienced zero traffic deaths for three years as of 2021. Instrumental in this has been Mayor Ravi Bhalla’s Vision Zero program. Mayor Bhalla’s 2019 executive order has resulted in the city extending its bike-lane network 38 percent in 2019 and 2020, with its total on-street network of 16.3 miles now nearly half of the city’s 33 miles of streets.

The city also has put in curb extensions at intersections, marked wider crosswalks, and timed traffic signals to give pedestrians a seven-second head start. When it’s warmer, major commercial areas of the city are closed to cars entirely or assigned as “slow streets” with decreased traffic and velocities.

“While we’ve made major progress in the past three years, having no pedestrian fatalities and a reduction in pedestrian injuries, we are striving to create even safer streets in the years ahead,” said Mayor Bhalla. “With the adoption of the Vision Zero Action Plan, we’ll be able to take even more actionable steps to reach our goal of all traffic-related deaths and injuries by 2030, one of the most ambitious Vision Zero goals in the entire country.” 

With these steps being implemented nationwide, entire communities are becoming safer. Additionally, insurers could potentially pass the savings produced by lower accident rates onto consumers, as they did earlier in the pandemic.

Now the U.S. federal government has announced its own version of Vision Zero. In late January, federal transportation officials released a plan to reduce the tens of thousands of road deaths that occur every year.

Auto Insurance, Market Conditions

Why Personal Auto Insurance RatesAre Likely to Keep Rising

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Personal auto insurance premium rates have returned to pre-pandemic levels, but several trends are likely to sustain upward pressure on rates, according to a new Triple-I Issues Brief.

At the start of the pandemic, auto insurers – anticipating fewer accidents amid the economic lockdown – gave back approximately $14 billion to policyholders in the form of cash refunds and account credits. But while miles driven declined and accident frequency initially dropped, frequency and severity quickly started increasing again. Traffic fatalities also increased, after decades of steady declines.

While insurers’ personal auto loss ratios fell briefly and sharply in 2020, they have since climbed steadily to exceed pre-pandemic levels. With more drivers on the road and replacement parts climbing, this loss trend is expected to continue.

Auto premium rates reflect a range of factors that contribute to an insurer’s loss experience. In a world of perfect information, rate changes would correlate perfectly with changes in loss experience. As the chart below shows, until the pandemic these two metrics for the overall industry tracked quite closely. The disruptions of 2020 led to volatility for both, and losses have proved more volatile than pricing.

Barely profitable

To remain viable, insurers have to set premiums at levels appropriate to the risks they cover. Insurers’ underwriting profitability is measured by a “combined ratio”, which is calculated by dividing the sum of claim-related losses and all expenses by earned premium. A combined ratio under 100 percent indicates a profit. A ratio above 100 percent indicates a loss.

As the chart above shows, personal auto insurance has been a barely profitable line for the industry for years. If recent accident and replacement-cost trends persist, upward pressure on premium rates is likely to continue.  

Learn More

Facts + Statistics: Auto insurance

Why Did My Auto Insurance Costs Go Up Even When I Didn’t File a Claim?

Triple-I Offers U.S. Insights into Auto Insurer Pricing Factors

Insurance Industry

Political & Trade Credit Insurers Protect Against Asset, Profit Losses for Businesses in Ukraine

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By Michel Leonard, PhD, CBE, vice president, senior economist and data scientist, head of Triple-I’s Economics and Analytics Department

Ukraine is one of the largest insured risks countries for political risk insurance (PRI) and Trade Credit Insurance (TCI). This predates the current situation in Ukraine and started immediately after the country’s accession to sovereignty.  

In Ukraine, PRI and TCI tend to be primarily purchased by foreign companies with cross-border trade or investments in the extraction and manufacturing sectors. New PRI losses in Ukraine due to Russia’s invasion will likely be material but well within the ability of private carriers to perform on their obligations. Indeed, several factors, including carriers’ reserves against future losses in Ukraine and the large role of government and multi-lateral agencies in providing PRI and TCI coverage, have contributed to significantly reducing private carriers’ outstanding exposures to Ukraine and Russian risks. . 

Losses due to Russia’s invasion of Ukraine would fall under comprehensive Political Violence and, more specifically, under War and Civil War and Strikes, Riots, and Civil Commotion. PRI coverage protects primarily against loss of assets or profits while TCI’s credit default coverage protects primarily against loss of profits due to force majeure. Depending on terms of coverage, PRI and TCI cover against loss of profits due to sanctions.

The majority of private carriers providing PRI insurance are based in the United States, at Lloyd’s, and in Bermuda. 

The main risk associated with Russia’s attack of Ukraine for business in the U.S. and is Russian cyber attacks regardless of whether or not they have operations, investments, or do business in Ukraine. A PRI policy is not necessary to cover Russian cyber attacks against U.S. businesses in the United States.

Health & Safety, Legal Environment

Evolving Conceptions of Gun Liability

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By Max Dorfman, Research Writer, Triple-I

Two recent developments – one the result of litigation, the other imposed by statute – warrant insurers’ attention, as they reflect shifts in legal thinking on potential firearms-related liability.

Nearly 10 years after the Sandy Hook Elementary School massacre in Connecticut, during which 20 first graders and six staff members were killed, a federal bankruptcy court in Alabama agreed to insurance payments totaling $73 million from gun manufacturer Remington Arms. The payment will be dispersed to the victims’ families who participated in the lawsuit.

This is the first time a gunmaker has been held accountable for a mass shooting in the United States. The ruling could force insurers to become more prudent in how they cover these companies. The risks of such settlements must be considered, particularly as the political and legal landscape continues to evolve.

The case revolved around the notion that Remington negligently sold civilian consumers assault-style rifles, which the plaintiffs argued are only suitable for use by military and law enforcement personnel. This, they argued, breached the Connecticut Unfair Trade Practices Act by the sale or wrongful marketing of the rifle.

Remington, which filed for bankruptcy protection in July 2020, contested that the plaintiffs’ legal arguments don’t apply under Connecticut law and invoked a federal statute, called the Protection of Lawful Commerce in Arms Act, which generally immunizes firearms manufacturers, distributors, and dealers from civil liability for crimes committed by third parties using their weapons.

The plaintiffs were able to demonstrate that the Remington used an “aggressive, multi-media campaign that pushed sales of AR-15s through product placement in first-person shooter video games and by touting the AR-15’s effectiveness as a killing machine,” according Josh Koskoff, lead counsel and partner at the Connecticut law firm Koskoff, Koskoff & Bieder, which represented the Sandy Hook families. 

San Jose takes notice

San Jose, Calif., recently approved the nation’s first mandatory gun liability insurance requirement. The news comes four months after a mass shooting on a light rail in the city, which resulted in nine deaths.

San Jose Mayor Sam Liccardo said gun liability insurance will be similar to car insurance, promoting responsible gun ownership, storage, and use, with the fees for possession of firearms potentially hovering between $25 and $30 a year.

Though this insurance cannot legally cover deliberate harm caused by a gun owner, it nonetheless marks a novel way to confront potential mass shootings. Second Amendment activists in San Jose contest the mandatory insurance, stating that this will primarily affect lawful gun owners and not criminals.

While the San Jose measure might remain an anomaly, it reflects a shift in thinking on firearms-related liability. Most insurers do not offer stand-alone gun liability coverage, and no other municipalities appear to be in the process of requiring it. But shifting public sentiment could lead to other ways to address gun violence through the courts and by statute.

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