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Emerging Risks, Legal Environment

What Is Social Inflation? What Can InsurersDo About It?

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A recent study by the Geneva Association on the topic of “social inflation” addresses the challenges of defining and quantifying the phenomenon. More important, it takes on the question of what insurers and reinsurers can actually do about it.

“Social inflation is a term that is widely cited in insurance debates but it is often ill-defined or at best only loosely explained,” the report begins. Broadly speaking, it “refers to all ways in which insurers’ claims costs rise over and above general economic inflation.”

Actuaries typically label such growth in claims costs “superimposed inflation,” the study says, but their measures “may not adequately account for advances in medical technology, which create new therapies, change the costs of treatment, and increase the lifespan of seriously injured claimants,” as well as other considerations.

More narrowly, the report says, “social inflation refers to legislative and litigation developments which impact insurers’ legal liabilities and claims costs.”

The definitional difficulties are well illustrated in the rendering below, from the study.

Understanding what drives these costs – and whether they are temporary phenomena or a long-term trend – is essential to adequately pricing insurers’ exposures and enabling them to pay claims.

Major drivers, possible solutions

Rollbacks in tort reforms stemming from past insurance availability and affordable crises have been implicated by some for driving social inflation. The report finds that any such correlations are “weak at best.”

More significant, the study found, are shifting judge and jury attitudes in ways favorable to plaintiffs; growing anti-corporate bias; and aggressive tactics used by plaintiff attorneys, including third-party litigation funding.  

What can insurers do to battle social inflation? The report suggests four areas of focus:

  • Engage in the public-policy debate to promote legislative changes that further level the playing field between plaintiffs and defendants;
  • Get better at defending against aggressive and increasingly well-armed plaintiffs’ attorneys;
  • Upgrade underwriting to reduce opportunities for claims surprises. “Insurers need better early-warning systems,” the report says, drawing on information from across their organizations, their own and competitor liability cases, and data from social and digital media;
  • Develop products with an eye toward mitigating social inflation. Given the scale of potential liability exposures, the report says, “co-participation arrangements” to share risks among reinsurers could help maintain and even expand the boundaries of insurability. Parametric insurance also might have a role to play.

More on social inflation, from the Triple-I Blog

LITIGATION FUNDING RISES AS COMMON-LAW BANS ARE ERODED BY COURTS

SOCIAL INFLATION AND COVID-19

LAWYERS’ GROUP APPROVES BEST PRACTICES TO GUIDE LITIGATION FUNDING

IRC STUDY: SOCIAL INFLATION IS REAL, AND IT HURTS CONSUMERS, BUSINESSES

FLORIDA’S AOB CRISIS: A SOCIAL-INFLATION MICROCOSM

Insurance Industry, Insurers and the Economy

What property/casualty insurance industrycan expect fromBiden White House

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On January 20, in a historic inauguration ceremony surrounded by U.S. soldiers guarding against domestic terrorism — before a field of 200,000 illuminated flags representing Americans who could not attend the ceremony because of the coronavirus pandemic — President Joe Biden and Vice President Kamala Harris were sworn into office.

Sean Kevelighan, CEO, Insurance Information Institute (Triple-I), today released the following statement:

“Every four years—for more than two centuries—the United States has celebrated its Constitution, and that historic document’s invocation of “We, the People,” through the orderly and peaceful transfer of power atop the government’s executive branch. With today’s inauguration of President Joseph Biden and Vice President Kamala Harris, that solemn tradition continues in our nation’s capital only two weeks after unprecedented lawlessness descended upon Washington, D.C.

The U.S. economy is facing extraordinary challenges due to the COVID-19 pandemic. Yet the U.S.’s insurance industry will continue to provide essential financial protections to individuals and businesses while at the same time employing millions of Americans and paying billions of dollars in taxes to support crucial government services. The industry-supported Insurance Information Institute congratulates the Biden-Harris administration as it takes office. We also stand ready to provide its policymakers with the Triple-I’s unique, data-driven insights on insurance to inform public policy.”

The Biden administration has listed COVID-19, economic recovery, racial equity, and climate change among its top priorities.

In coming months, the property/casualty insurance industry is likely to encounter a frenetic pace of legislative activity on many issues affecting its operations. Here are just a few:

Climate Change –  Senator Dianne Feinstein’s proposed Addressing Climate Financial Risk Act, intended to help federal regulators understand and mitigate risks from climate change within the financial system, would require a Federal Insurance Office (FIO) report on how to modernize and improve climate risk insurance regulation.

“The insurance industry is more directly affected by climate risk than other areas of the financial system,” said Feinstein’s press release. The report would be modeled on FIO’s 2013 report on modernizing state insurance regulation.

Rep. Carolyn Maloney introduced the Pandemic Risk Insurance Act, which is modeled after the Terrorism Risk Insurance Act enacted after 9/11. However, the bill has yet to gain widespread support. The insurance industry has advanced several pandemic risk mitigation proposals of its own.

Congress could deliberate reauthorizing the National Flood Insurance Program, which was last done with the Biggert-Waters Flood Insurance Reform Act of 2012.

Full federal marijuana legalization remains daunting, with a slim Democratic majority, according to Politico, but piecemeal legislation with wider bipartisan support, such as banking access for cannabis businesses and medical marijuana research, may have a better chance to advance. Conflicting state and federal laws have discouraged insurers from participating in the cannabis-related business market.

An expected increase in the corporate tax rate would mean higher tax liabilities for property/casualty insurers.

Risk-based insurance pricing is an issue that’s expected to heat up, and insurers will have to explain to a new set of legislators that the business of insurance hinges on predicting the level of risk a policyholder represents and charging a premium that corresponds with that level of risk.

On January 28, at Triple-I’s virtual Joint Industry Forum, CEOs from five major insurance industry trade associations will share their perspectives and public policy priorities for 2021. Click here to register for the complimentary event.

Disaster Preparedness, Disaster Resilience, Flood Insurance, Floods

Study Supports Casefor Flood Mitigationas World Warms

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Intensifying rainfall fueled by climate change over the past 30 years has caused nearly $75 billion in flood damage in the United States, according to a study by Stanford University researchers.

The findings, published in the journal Proceedings of the National Academy of Sciences, shed light on the growing costs of flooding and the heightened risk faced by homeowners, builders, banks and insurers as the planet warms. Losses resulting from worsening extreme rains comprised nearly one-third of the total financial cost from flooding in the U.S. between 1988 and 2017, according to the report, which analyzed climate and socioeconomic data to quantify the relationship between changing historical rainfall trends and historical flood costs.

About 90 percent of natural disasters in the United States involve flooding, and much has been written about the flood protection gap.

“On average nationwide, only 30 percent of homes in the highest risk areas have flood coverage,” according to the Risk Management and Decision Processes Center of the Wharton School at the University of Pennsylvania, a Triple-I Resilience Accelerator partner. “Less than 25 percent of the buildings flooded by Hurricanes Harvey, Sandy, and Irma had insurance. Indeed, repeatedly after floods there is evidence of the United States’ large and persistent flood insurance gap.”

To make matters worse, a recent analysis by the nonprofit First Street Foundation found the United States to be woefully underprepared for damaging floods. The foundation identifies “around 1.7 times the number of properties as having substantial risk,” compared with Federal Emergency Management Agency (FEMA) flood designation.

Flood coverage isn’t included in most homeowners insurance policies, so many may not know they don’t have it if their bank didn’t require them to buy it before providing a mortgage. Until recently, flood insurance was considered an untouchable risk for private insurers to write, so FEMA’s National Flood Insurance Program (NFIP) was the only game in town.

In recent years, however, Congress adopted new laws to support the emergence of a robust domestic private flood insurance market.  Last year, regulators provided rules that allowed private carriers to offer flood policies outside of NFIP and to qualify for the mortgage flood insurance requirement. Carriers and reinsurers are expanding their use of sophisticated models to underwrite flood risk, driving the growth of private sector flood insurance.

Triple-I has more information about flood insurance in our Spotlight on: Flood insurance article.

Auto Insurance, Insurance Industry

Auto insurance rates decline across the U.S.

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Auto insurance rates declined in 2020 for the first time in a decade, according to a recent survey by ValuePenguin.com. The survey results anticipate a 1.7 percent decline nationally.

A major factor in the decline are the pandemic-related discounts granted by insurers in 2020. These discounts have been valued at $14 billion, according to Triple-I estimates. Triple-I Chief Actuary James Lynch reported that many auto insurers are building these discounts into rates for 2021 and that driving declined by as much as 50 percent during spring lockdowns.

The estimate of just how much rates are declining depends on the metrics you use. The Consumer Price Index (CPI) report for December 2020 indicates that auto insurance rates declined by 4.8 percent nationwide compared with the same month last year. By contrast, the CPI showed the cost of new vehicles rising by 2 percent in December and by 0.5 percent for the full year 2020.

A comprehensive July 2018 assessment of the Missouri auto insurance market by the state’s Department of Insurance discovered even larger declines. It found that, when adjusted for inflation, the typical Missouri driver has seen a 17 percent decrease in auto insurance premiums since 1998.

Insurance Industry

Triple-I’s 2021 Insurance Fact Book Chronicles a Historic 2020

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The Insurance Information Institute (Triple-I), an affiliate of The Institutes, has released its 2021 Insurance Fact Book, an essential resource for anyone who needs up-to-date information on insurance.

This year The Insurance Fact Book has new content to address many of the past year’s events, in such areas as: insurer response to the pandemic; civil disturbances; and homeowners high-risk markets.

Highlighted in the “Emerging and Evolving Insurance Issues” section are five unique insurance risks that have been impacted by the COVID-19 pandemic: business income (interruption) insurance; workers compensation; extreme weather; social inflation; and cyber.

“2020 provided a good illustration not only ofhow the disruption continuum is evolving, but also how the insurance industry is able to adapt and lead,” said Sean Kevelighan, CEO, Triple-I. “While the year began fairly normally, we very quickly encountered a global pandemic that still rages; a 2020 Atlantic hurricane season for the record books; and Western wildfires that burned their way through homes and businesses. All the while claims for covered catastrophes were paid in new and innovative ways, and many customers experienced premium rebates and returns from auto insurers, given the lack of driving during economic lock-downs.”

The 2021 Insurance Fact Book is a digital publication available for purchase from the Triple-I online store. It is available free of charge to Triple-I members. The Insurance Fact Book, issued annually since the Triple-I’s inception in 1960, helps inform the decisions of policymakers and business leaders and is an essential resource for journalists, researchers, and academics, among others. 

The Fact Book includes thousands of facts, figures, statistical tables, and charts documenting primarily the property/casualty insurance industry in the U.S. and worldwide. The publication offers details on auto, homeowners, and business insurance markets, with data on direct premiums written and the factors impacting the cost of these coverages. Additionally, there is voluminous information on the life/annuity insurance and reinsurance industries.

Insurance Industry, Workers Compensation

What COVID-19 means for workers comp claims

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So far, the impact of COVID-19 on workers compensation has not been as great as first feared. The National Council on Compensation Insurance (NCCI) reported that as of the second quarter 2020, out of every 100,000 active workers comp claims, COVID-19 medical claims accounted for only about 200, depending on the jurisdiction.

Still, the pandemic presents uncertainties and concerns for workers compensation, just as it does for many other sectors.

NCCI’s annual survey found that COVID-19 was the top concern of workers compensation executives going into 2021.  Executives worry about uncertainty surrounding the duration of the pandemic, the size and number of claims that could develop, recovery time for workers sickened by COVID-19 and whether there would be long-term needs or lasting adverse effects.

Executives also mentioned state compensability presumptions that have arisen during the pandemic. These presumption rules, passed by various states, say that COVID-19 infections in certain workers are presumed to be work-related and covered under workers compensation. This presumption places the burden on the employer and insurer to prove that the infection was not work-related making it easier for those workers to file successful claims.

The executives surveyed by the NCCI expressed concern about the variations developing across states and the complexity of legislation and regulations that adds to the challenge of the rapidly evolving environment. Several noted issues and questions related to reinsurance for presumptive claims. Others are anticipating that compensability presumptions for contagious diseases, such as those instituted for COVID-19, will be widely adopted and permanently enacted or even expanded, in some cases, to include other common diseases.

In many states, immigrants are eligible for workers compensation benefits regardless of their legal status. A recent blog post by a legal expert showed how a decision by the Supreme Court of Nevada reiterated that the state’s workers’ compensation statutes clearly and unambiguously protected every person in the service of an employer, whether lawfully or unlawfully employed. The high court affirmed the judgment of the state district court that denied judicial review to an appeals officer’s decision awarding permanent total disability benefits to an undocumented worker.

Disaster Resilience, Flood Insurance, Floods

Expanded Triple-I Flood Risk Maps Provide Richer Perspective

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The Triple-I Resilience Accelerator’s flood risk visualization tool is being enhanced with:

  • National Flood Insurance Program (NFIP) data on “take-up rates” by U.S. county from 2010 to 2021,
  • Differences between take-up rates inside and outside of flood zones, and in different proximities to flood zones.

These additions will expand the Accelerator’s visualization from covering only the current year to providing an historical perspective on how take-up rates have changed over time. 

Take-up rates and resilience

Insurance take-up rates represent the percentage of people eligible for a particular coverage who take advantage of it. In the case of flood insurance, they are calculated as the number of insurance policies in force in a certain geography over the total number of eligible properties for which insurance can be bought.

Understanding flood insurance take-up rates is essential to assessing and improving communities’ ability to rebound from damaging events. About 90 percent of natural disasters in the United States involve flooding, the NFIP says, and much has been written about the flood protection gap.

“On average nationwide, only 30 percent of homes in the highest risk areas have flood coverage,” according to the Risk Management and Decision Processes Center of the Wharton School at the University of Pennsylvania, a Triple-I Resilience Accelerator partner. “Less than 25 percent of the buildings flooded by Hurricanes Harvey, Sandy, and Irma had insurance. Indeed, repeatedly after floods there is evidence of the United States’ large and persistent flood insurance gap.”

But understanding that gap to a degree that will support meaningful action requires comprehensive, granular data only NFIP can provide. It also requires the data to be available in easy-to-use formats. This is where the Triple-I/NFIP collaboration comes into play.

Key considerations to keep in mind when looking at take-up rates are year-over-year changes; whether the rates are by city, county, or state; and whether they are for all homes or homes in flood zones alone. During the first quarter of 2021, Triple-I’s Resilience Accelerator’s flood map will be updated with four options for users to visualize:

  • Annual take-up rates from 2010 to 2018,
  • 2019 take-up rates based on 2018 renewals only,
  • County-wide and flood-zones-only take-up rates estimates for 2020, and
  • County-wide share of dwellings in close proximity to flood zones.

Historical perspective

In 2019, NFIP started publishing historical data on NFIP insurance coverage, policies, and claims. NFIP’s decision to publish this data was a transformative point for industry practitioners, academics and those involved with flood insurance analysis. The Triple-I’s visualizations use NFIP’s full- and part-year data from 2010 to 2019 and our own estimates, based on this data, for 2020.

Dr. Michel Léonard, CBE, Triple-I vice president and senior economist says: “We’ve worked closely with NFIP to ensure that our visualizations reflect the most current, accurate information available on flood insurance take-up rates. In addition, we wanted to add to the discussion surrounding NFIP take-up rates by providing less common yet insightful ways to understand and visualize take-up rates, such as take-up rates for properties in flood zones only or the share of a country’s property in different proximities to flood zones.”

Flood coverage, as opposed to water damage from mechanical breakdown inside a house, isn’t included in most homeowners insurance policies, so many homeowners may not realize they don’t have it if their bank didn’t require them to buy it before providing a mortgage. Until recently, flood insurance was considered an “untouchable” risk for private insurers to write, so the NFIP was the only game in town.

In recent years, however, Congress adopted new laws to support the emergence of a robust domestic private flood insurance market.  Last year, regulators provided rules that allowed private carriers to offer flood policies outside of NFIP and to qualify for the mortgage flood insurance requirement. Carriers and reinsurers are expanding their use of sophisticated models to underwrite flood risk, driving the growth of private sector flood insurance.

 “We want to acknowledge and stress how significant the NFIP Policy and Claims data is to increasing our understanding of flood risk,” Léonard said. “Good data takes a lot of work, and NFIP’s commitment to making this data available is a perfect example of public-private partnerships delivering concrete value.”  

Insurance Industry, Webinars

One Year. Two Forums. We’re Virtual in January and In Person in June

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2021 is already looking brighter. Triple-I is presenting not one, but two, Joint Industry Forums in 2021! We’re kicking off the year with our virtual forum—Virtually Together: Insuring Our Way Forward—on Jan. 28. Then we’re making plans to gather in June in Washington, DC.

Registration for our first virtual Joint Industry Forum is complimentary. Plus, attendees to the virtual Forum receive a discounted registration for the in-person event.

Our virtual Forum focuses on the industry’s shared work to insure and protect. We have three sessions on tap for the day featuring dynamic industry thought leaders.

Trade Winds Navigation: More Rough Waters or Smooth Sailing Ahead?

Climate Change Risk & Resilience: Facing the Facts

CEO Perspectives

Confirmed Speakers (with more to be announced soon!)

• Tim Adams, President and CEO, Institute of International Finance

• Charles Chamness, President and CEO, National Association of Mutual Insurance Companies

• Sean Kevelighan, CEO, Insurance Information Institute

• Peter Miller, President and CEO, The Institutes

• Frank Nutter, President, Reinsurance Association of America

•David Sampson, President and CEO, American Property Casualty Insurance Association

Register today

Legal Environment

Litigation Funding Rises as Common-Law Bans Are Eroded by Courts

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Litigation funding – the practice of third parties financing lawsuits in exchange for a share of any funds the plaintiffs might receive – was once widely prohibited. As these bans have been eroded in recent decades, the practice has grown, spread, and become a contributor to social inflation: increased insurance payouts and loss ratios beyond  what can be explained by economic inflation alone.

Social inflation is a broad term that insurers use to describe these rising expenses. Litigation funding is just one factor driving it.

The relevant legal doctrine – called “champerty” or “maintenance” – originated in France and arrived in the United States by way of British common law. The original purpose of champerty prohibitions, according to an analysis by Steptoe, an international law firm, was to prevent financial speculation in lawsuits, and it was rooted in a general mistrust of litigation and money lending.

The erosion of champerty prohibitions can be traced to the early 1990s in the United Kingdom and Australia.

“By the mid-1990s, a handful of Australian states had already done away with Maintenance and Champerty offenses such that they were no longer crimes or torts,” according to an article published by Harvard Law School’s Center on the Legal Profession. “Whether this rendered litigation finance permissible, however, remained doubtful. One jurisdiction [New South Wales] notably abolished Maintenance and Champerty offenses through formal legislation.”

These moves, the article goes on to say, “produced ambiguity around the use of litigation finance arrangements, where before they were more clearly prohibited.”

England, Canada, and Australia have since largely abandoned their laws against champerty, Steptoe writes, but Ireland, New Zealand, and Hong Kong continue to prohibit certain transactions as “champertous.”

Slow to take hold in U.S.

Despite the size of the potential market, litigation funding took time to gain traction in the United States because prohibitions on champerty are left to state legislatures and courts.  Some states have abandoned their anti-champerty laws over the past two decades. Others still prohibit champerty, either by statute or common law. Some, like New York, have adopted “safe harbors” that exempt transactions above a certain dollar amount from the reach of the champerty laws.

Minnesota recently became the latest state to abandon its champerty prohibition. In Maslowski v. Prospect Funding Partners LLC, the Minnesota Supreme Court held that the litigation funding agreement under consideration was champertous; however, it also held that champertous contracts no longer contravene “public policy as we understand it today.” 

The court explained that the common-law prohibition against champerty was originally based on a desire to prevent abuse of the court system by individuals wealthy enough to finance lawsuits. It held that the doctrine against champerty is no longer the only or best tool for achieving that goal – and, in fact, may “increase access to justice” by enabling individuals who might not otherwise have the financial means to pursue their claims in court. 

Courts drive decline of anti-champerty laws

The Minnesota Supreme Court was able to abolish the doctrine, Steptoe writes, because Minnesota’s prohibition was based on common law, rather than statute. This is in contrast to New York, where the prohibition is statutory. Re-examining it is the responsibility of the state legislature, not the courts.

As the popularity of litigation funding – along with awareness of its impact on insurers and policyholders – grows, the practice has come under increased scrutiny.  The policymaking arm of the American Bar Association (ABA) recently approved a set of best practices for such arrangements. 

The resolution – adopted by the ABA’s House of Delegates by a vote of 366 to 10 – lists the issues lawyers should consider before entering into agreements with outside funders. While it avoids taking a position on the use of such funding, it recommends that lawyers detail all arrangements in writing and advises them to ensure that the client retains control.

The resolution also cautions attorneys against giving funders advice about the merits of a case, warning that this could raise concerns about the waiver of attorney-client privilege and expose lawyers to claims that they have an obligation to update this guidance as the litigation develops. 

Health & Safety

Home Safety During the Holiday Season

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By Max Dorfman, Research Writer, Triple-I

Holidays are usually occasions for celebration and family gatherings. But in this pandemic holiday season we remind you to please observe the social distancing rules and advisories in your area.

Triple-I also offers these tips to help make sure everyone is safe and injury-free this holiday season.  

Decorations

According to the U.S. Consumer Product Safety Commission (CPSC), there are approximately 200 decorating-related injuries each day during the holiday season, with about half involving falls. During the 2018 holiday season, 17,500 people were treated in emergency rooms due to holiday decorating-related injuries, with six deaths associated with holiday season decorations in 2019.

Our Tips: Choose the correct type of ladder for hanging lights, making sure they are indoor lights for indoors or outdoor lights for outdoors; do not nail, tack, or stress wiring when hanging lights; and keep plugs off the ground and removed from puddles and snow.

Fires

Christmas trees are involved in about 200 home fires per year, according to the National Fire Protection Association (NFPA). Home Christmas tree fires caused an average of six deaths, 16 injuries*, and $14.8 million in direct property damage annually from 2011 to 2015.

Electrical distribution or lighting equipment was involved in 40 percent of the home Christmas tree structure fires. About 26 percent occurred because some type of heat source was too close to the tree. Decorative lights were involved in 18 percent of these incidents.

Eight percent of home Christmas tree fires were started by candles, which are another major fire hazard. The top three days for home candle fires were Christmas, New Year’s Day and New Year’s Eve, according to the NFPA.

However, cooking fires remain the number one cause of residential fires, an average of 1,700 cooking fires occur on Thanksgiving Day each year. Christmas day and Christmas eve are also peak times for cooking related fires.

Our Tips: Do not leave cooking food unattended and keep children away from the cooking area; keep candles at least 12 inches away from anything that can burn; blow them out when you leave the room or go to bed; be careful if someone in the household is using oxygen; and keep candles away from children.

Gift Giving

Although giving toys as presents during this season should be celebrated, there are also risks associated with them. According to a CPSC study from 2019, there were approximately 162,700 toy-related, emergency department-treated injuries and 14 deaths of children under 15 years old, with most related to choking on small parts, like small balls and small toy parts and riding toys.

Our tips: Choose toys in the appropriate age range, with toys with small parts not given to children under three and toys that must be plugged into an electrical outlet not gifted for children under 10; and be aware of toy recalls. Non-motorized scooters in particular are associated with a high rate of accidents, though that has been declining.

Home Care

We also remind you to keep your home heated to at least 65 degrees, let hot and cold faucets drip to prevent freezing and to keep your fireplace flue closed when it is not being used.

*These do not include firefighter deaths and injuries which are recorded separately by the NFPA.

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