Here are the 5 most clicked on articles from this week’s Triple-I Daily newsletter.
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Never heard of “social inflation”? It’s a fancy term to describe rising litigation costs and their impact on insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage.
While there’s no universally agreed-upon definition, frequently mentioned aspects of social inflation are growing awards from sympathetic juries and a trend called “litigation funding”, in which investors pay plaintiffs to sue large companies – often insurers – in return for a share in the settlement.
Less discussed are state initiatives that inadvertently invite costly abuse. Florida’s assignment of benefits crisis is an excellent example.
Assignment of benefits (AOB) is a standard insurance practice and an efficient, customer-friendly way to settle claims. As a convenience, a policyholder lets a third party – say, an auto glass repair company – directly bill the insurer.
Easy.
In Florida, however, legislative wrinkles have spawned a crisis.
The state’s “David and Goliath” law was meant to level the playing field between policyholders and economically powerful insurers. It lets plaintiffs’ attorneys collect fees from the insurer if they win their case – but not vice versa. If the insurer wins, the plaintiff owes the insurer nothing. This creates an incentive for attorneys to file thousands of AOB-related suits because there is no limit on the fees they can collect and no risk. Legal fees can dwarf actual damages paid to the policyholder – sometimes tens of thousands of dollars for a single low-damage claim.
AOBs are an efficient, customer-friendly way to settle claims…. In Florida, however, legislative wrinkles have spawned a crisis.
This type of arrangement is unique to Florida. And, despite efforts to contain it through reforms to the state’s personal injury protection (PIP) program, the abuse has spread beyond its origins in the southern part of the state and to other lines than personal auto and homeowner’s insurance. More than 153,000 AOB suits were filed in Florida in 2018 – a 94% increase from about 1,300 five years earlier.
Contributing to the crisis is the ease with which unscrupulous contractors can “find” damage unrelated to an insured incident or overbill for work done and file a claim. Florida statutes let policyholders assign benefits to a third party without insurer consent – which limits the insurer’s ability to monitor a claim to make sure costs aren’t inflated.
A measure signed into law by Gov. Ron DeSantis earlier this year aimed to curb AOB litigation by putting new requirements on contractors and letting insurers offer policies with limited AOB rights, or none at all. However, it excludes auto glass repairs. The number of auto glass AOB lawsuits statewide in 2013 was over 3,800; by 2017, that number had grown to more than 20,000.
Florida’s experience provides an ongoing study into how hard it can be to stuff the social inflation genie back into its bottle.
For more details, see I.I.I.’s white paper, “Florida’s Assignment of Benefits Crisis: Runaway Litigation Is Spreading, and Consumers are Paying the Price”.
The House Financial Services Committee on October 31 approved an amended version of the Terrorism Risk Insurance Program Reauthorization Act of 2019 that would require the Government Accountability Office (GAO) to report on cyberterrorism risks and the Department of Treasury to issue a biennial report that includes “disaggregated data on places of worship.”
The Terrorism Risk Insurance Act of 2002 (TRIA), approved after the 9/11 terrorist attacks in New York City and Washington, D.C., provided a backstop to encourage insurers to resume writing terrorism policies. After 9/11, primary insurers sought to explicitly exclude terrorism coverage from their commercial policies, and reinsurers became unwilling to assume risks in urban areas perceived as vulnerable to attack.
TRIA created the Terrorism Risk Insurance Program (TRIP), a federal loss-sharing program for certain insured losses resulting from a certified act of terrorism. TRIP provides a backstop for insurers and has to be periodically reauthorized. It is currently due to expire at the end of 2020.
In addition to the reporting requirements mentioned above, the amended legislation shortens the extension period from 10 years.
The bill says the cyber report should analyze the general vulnerabilities and potential costs of cyberattacks on the nation’s infrastructure and reach conclusions about whether cyberrisk, particularly cyberliabilities, under property/casualty insurance, can be sufficiently covered and adequately priced.
The insurance industry has praised the progress of the extension as well as the proposed studies of cyber exposures. The next step toward TRIA reauthorization is a floor vote in the House of Representatives.
Follow the conversation about the federal terrorism backstop here.
By Max Dorfman, Research Writer, Insurance Information Institute
Deer season—which usually runs from October through December—can be a dangerous time for motorists. During this period, deer are moving frequently and often cross over dangerous areas, like highways and other heavily-trafficked areas.
According to the Insurance Institute for Highway Safety, there are more than 1.5 million accidents related to deer every year, which result in over $1 billion in vehicle damages. And these accidents aren’t merely expensive: 211 people died in collisions with animals in 2017.
Indeed, between July 1, 2018 and June 30, 2019 one out of every 116 drivers had an insurance claim from hitting an animal, according to State Farm. These claims were most likely in West Virginia, with one in 38 people making an insurance claim based on this kind of accident.
With this in mind, it’s important to take precautions when driving during this period of the year. Deer often travel in groups, so it’s vital to slow down with even one deer on the side of the road. Additionally, try to brake instead of swerving if faced with a crash. Above all, be alert—there’s no substitute for prudence during deer season.
The Insurance Information Institute has Facts & Statistics on deer vehicle collisions here.
Each month we summarize the latest research relevant to the insurance industry. Highlights from the November issue include:
And much more…..
By Max Dorfman, Research Writer, Insurance Information Institute
Brexit and Lloyd’s of London
The latest (but perhaps not the last) Brexit deadline is set for January 31, 2020. Yet the insurers most affected by the U.K.’s divorce from the European Union (EU) have plans in place to continue business with minimal disruption. Indeed, U.K. businesses have been operating in the EU’s Single Market for so long, many are questioning how these entities will adapt to increased regulations. One entity where these questions are particularly relevant is Lloyd’s of London.
What is Lloyd’s?
Lloyd’s is not an insurance company, but a marketplace where capital and underwriting converge on a global platform operated by the Corporation of Lloyd’s. Lloyd’s includes five key stakeholders: syndicates, which function as underwriting entities, assuming risks and paying claims; managing agents, who capitalize and operate the syndicates; brokers, who are intermediaries between policyholders and syndicates; coverholders, which are local MGA’s that underwrite risks on behalf of a syndicate/managing agent (and which also enables the Lloyd’s market to operate globally without establishing local offices); and insurance buyers, many of whom buy insurance through Lloyd’s for complex, emerging or otherwise unique risks. Syndicates specialize in different types of insurance and reinsurance, often participating with each other on a subscription basis (meaning they only take on a part of the risk and pay part of the claim).
The consequences
With gross global premiums written at almost $45 billion in 2018, 13 percent of that generated by the post-Brexit European Union, there were legitimate concerns about how Brexit would affect Lloyd’s role in the EU marketplace. Due to Brexit, “non-admitted” U.K. insurers will no longer be able to conduct insurance business in some EU countries, meaning that nonauthorized insurers cannot conduct business in regulated insurance industries in a different market (which is currently the case in France, Italy, and under certain circumstances, in Germany).
However, Lloyd’s quickly pivoted to ensure that it will continue to provide non-life insurance throughout the European market, regardless of Brexit’s outcome. Although it is anticipated that most of the European Economic Area (EEA) reinsurance will still be written through London on a cross-border basis, in case of a hard Brexit non-life insurance could be covered by Lloyd’s Brussels, which opened in 2018.
Still, non-EU coverholders for Lloyd’s of London—who could previously conduct business throughout the EU without physical offices and permissions from member states—will have to seek proper authorization from the EEA under a “Coverholder Appointment Agreement” (CAA) with Lloyd’s Brussels. This may affect where managing agents raise capital.
Will these new regulations be felt in the US?
A very substantial portion of Lloyd’s international business—over 40 percent of global premiums as of 2018 —is generated in the U.S., with significant exposure on the U.S. insurance lines. While the new regulations will not directly affect business between the U.S. and U.K., the primary concern will be the volume of business in the EEA, which could potentially decrease. But if Lloyd’s pivots some of its business away from Europe, the U.S. could get more attention. In fact, John Neal, Lloyd’s chief executive, stated in an interview with the Financial Times that “If you’re in insurance or investment banking or banking, one dollar in two dollars of everything you do is still U.S. derived, so it’s very important that you maintain your connection and your relevance with the U.S. market.”
By Janet Ruiz, Director of Strategic Communications, Insurance Information Institute
On October 30 the National Weather Service issued its first-ever extreme red flag warning for Southern California and expects hurricane-force winds to continue until the first weekend in November. On October 31, 19 million people remained under red-flag warnings in the area. Thom Porter, head of Cal Fire, said that at least 20 separate wildfires broke out in Southern California on October 30.
In Northern California the Kincade Fire is 60 percent contained after burning for a week. Evacuees are now returning home. I watched the Kincade Fire from the northern side on Mt St. Helena. Airplanes and helicopters made their way in and out of the fire non-stop and firefighters were able to keep the fire out of the towns of Windsor and Healdsburg.
Here’s a photo from my back yard:
According to the LA Times, an intense surge in pre-deployed firefighting resources prevented the fire from destroying homes so far. Officials say the preparations for the winds have given them a fighting chance that they didn’t have last year, when the Woolsey fire — one of California’s most destructive on record — burned more than 1,000 homes and resulted in three deaths. Officials have said the battle against that fire was hampered by a lack of resources.
Legislation passed in Sacramento, first signed by Gov. Jerry Brown and then made permanent under Gov. Gavin Newsom, has allocated millions of dollars to pre-position firefighting resources during severe fire weather.
When you return home it is important to start the claim process right away.
Contact your agent or company to find out:
Write down your questions and be sure to get them all answered. The claims adjusters are your financial first responders and are here to help you recover and rebuild!
By Sean M. Kevelighan, CEO, Insurance Information Institute
“What does the future of insurance look like?” It’s the question that’s launched a thousand publications and panel discussions. And it’s an essential one that covers a lot of ground. In my case, literally.
The Insurance Information Institute (I.I.I.) partnered recently with InsureTech Connect (ITC) and Gamma Iota Sigma (GIS) at the two organizations’ flagship events, InsureTech Connect 2019 in Las Vegas, and Gamma Iota Sigma’s 48th annual International Conference in Dallas. What we came away with from these back-to-back events were two distinct but nevertheless complimentary visions of how things are now and what’s to come.
Briefly put, the future of insurance will be largely to make good on past promises. And this is not because we’ve been remiss in our duties but because people now are able to build and implement the right tools for the job. Speaking before thousands of InsureTech Connect 2019 attendees, Glenn Shapiro, president of Allstate Personal Lines, was blunt.
He noted making policyholders wait several days for an auto repair estimate that takes only a few hours to complete is: “[N]ot a service experience that you would accept in any other part of your life!” Embracing Insurtech and the power of innovation enables insurers like Allstate to automate processes and replace outmoded legacy systems to make insurance a truly customer-driven business. Insurers are now able to provide security and empowerment to their customers.
Which brings us to … resilience.
Early in 2019, ITC selected the I.I.I. to co-host its Resiliency Innovation Challenge, a four-month-long competition for Insurtech start-ups whose businesses are focused on catastrophe resilience. Fast forward to the final day of InsureTech Connect 2019, and an impressive field of 22 Insurtechs was pared down to three outstanding finalists: WeatherCheck, True Flood Risk and Cowbell Cyber, whose CEOs presented their products and businesses to a panel of experts. The group included Susan Holliday, senior adviser to the International Finance Corporation in Washington, D.C.; Arlene Kern, a strategic innovation scout at Munich Reinsurance Co.; Lee Ng, vice president, Innovation, at Travelers Cos. Inc.; and Kevin Pray, vice president, Innovation, at The Hanover Insurance Group.
The finalists come at the problem of catastrophe risk from markedly different angles—preparedness, risk assessment, and risk management, respectively. The beauty of this diversity of thought was that we had disparate applications of data coalescing around the power of resilience. Congratulations to Demetrius Gray, CEO of WeatherCheck, who walked away with the first-place trophy, as well as to all the competitors who made the inaugural Resiliency Innovation Challenge a huge success.
One of the key takeaways from the Challenge was how resilience is benefiting and inspiring people in ways other functions of our industry cannot. Innovation and, more important, awareness of new solutions to manage risk makes the goal of creating safer homes, businesses and communities an attainable one. Young men and women embrace this philosophy.
We saw this first-hand in students who’ve chosen to study risk management and insurance at the Gamma Iota Sigma International Conference in Dallas, TX. There, I was honored to moderate a panel discussion titled, “Plan. Respond. Recover: The Power of Resilience,” with Dr. Nidia Martinez, director of Climate Risk Analytics/Capital, Science & Policy Practice at Willis Towers Watson; Dr. Roger Grenier, senior vice president, Global Resilience, at Verisk’s AIR Worldwide, and Alessa Quane, executive vice president, Chief Risk Officer at AIG.
The panelists shared their perspectives on topics ranging from the value of public/private partnerships in closing insurance coverage gaps; the sometimes overlooked but nevertheless consequential challenges posed to insurers by climate change (e.g., the need to guide energy businesses through “transition risk” while they retool to meet rising market demand for renewable resources); and how insurers are succeeding in building resilience.
Suffice it to say, putting two intensely forward-thinking and forward-looking events like ITC 2019 and GIS’s International Conference into perspective is a tall order. Given the dizzying array of people, places and presentations that blew past us in a single week, it was reassuring to be reminded again of a few key facts. The Insurance Information Institute represents an industry that’s going all-in on reinventing itself to serve customers and make our communities safer and more prosperous. And that many are eager to join the insurance industry in bringing this vision to life. Or to borrow the words of Jay Weintraub, co-founder of InsureTech Connect: “People really care about insurance.”
Sean Kevelighan is chief executive officer of the Insurance Information Institute, a non-profit research, education and communications organization dedicated to improving public understanding of insurance — what it does and how it works.
An awkward moment during Advisen’s Cyber Risk Insights 2019 conference last week:
Panelists recalled how, in the early days of cyber, insurers often sought more information to write policies than clients could (or wanted to) provide. So, they started asking for less.
Most attendees remembered the “old days.” Many nodded. They understood.
The awkwardness came when one audience member observed that insurers “still chase market share” despite lacking complete policyholder risk information. “That sounds a lot like mortgage-backed securities before the financial crisis!”
Are cyber insurers falling down on the job, as many say lenders, regulators, rating agencies, and investors did before the 2008 financial crisis and subsequent recession?
The analogy may sound fair, but it falls apart on examination.
Mortgages and the financial crisis
In the early 2000s, it was easy to get a mortgage. Lenders would bundle loans to be sold as mortgage-backed securities. The theory: Few people would stop making payments and risk losing their homes. The rest would pay, and the security would deliver a fair return.
This made sense when lenders did their job. But too many abandoned their standards. Because they could sell them, lenders had no stake in whether the mortgages were paid.
Regulators and rating agencies, it has been argued, didn’t ask enough questions about the securities the loans supported. This gave investors more confidence than the investments warranted. When loans that should never have been made in the first place defaulted, the resulting dislocation of the homebuying and financial markets ushered in the Great Recession.
Where the analogy breaks down
Cyber insurers understand the risks they’re taking and price their policies accordingly. In fact, a recent I.I.I./J.D. Power survey found two of the top four reasons small companies choose not to buy cyber coverage are that it costs too much and contains too many exclusions.
Unlike the lenders and borrowers and investment banks in the early oughts, insurers have skin in the game. If they write bad business, they can’t simply pass it along to some naïve investor.
They also have a stake in customer relationships. They aren’t pushing policies, pricing them to sell, and hoping for the best. They’re working with clients to understand and address the clients’ vulnerabilities.
Cyber insurers understand the risks they’re taking and price their policies accordingly…. They also have a stake in customer relationships.
Seventy percent of small companies that bought cyber said their insurer helps with risk mitigation (up from 65 percent last year), according to the I.I.I./J.D. Power survey. At the Advisen event, I heard insurers and policyholders discussing how they can address these perils. Policyholders clearly wanted insurers to do more than write policies and pay claims, and the insurers were listening.
Conversations like these, and the spirit of transparency and shared responsibility they reflect and promote, are essential to staving off and mitigating the impact of cyberattacks. Insurers and insureds, together, are visibly seeking solutions to a real and growing problem.
The people behind the financial crisis quietly created problems in pursuit of opportunities, studiously unmindful of the collateral damage they were generating.
It’s no wonder that Boise, Idaho is one of the nation’s fastest growing cities: It boasts a thriving job market, breathtaking natural vistas and a buzzing brewery scene. Boise can also claim to have the nation’s safest drivers. According to Allstate’s America’s Best Drivers Report, released earlier this year, the average driver in the U.S. will experience a collision every 10.7 years, compared to every 13.7 years in Boise.
Allstate standardizes their rankings to level the playing field between drivers in densely populated areas and those in smaller cities. Allstate also determines safe cities to drive in by how weather affects road conditions, utilizing data to standardize average annual precipitation. However, many factors contribute to car crashes, including the number of cars on the road.
“Things like the layout of a city, its transportation network, traffic signs and lights, and law enforcement can all impact driving safety,” said Saat Alety, Allstate’s Director of Federal Legislative and Regulatory Affairs. “Different levels and types of traffic, noise, activity and varying road conditions and rules can make big-city driving different than driving in smaller or more suburban areas.”
The cities that landed on the bottom of the list are Los Angeles, Glendale, Worcester, Boston, Washington D.C. and Baltimore. In cities that rank lowest in safest drivers, there are roads that have been identified in the reports as particularly treacherous.
“America’s infrastructure is in dire need of an overhaul,” Alety said.
Allstate is offering $150,000 in grants that can be used for safety improvement projects on the 15 “Risky Roads.” The company is working with local safety experts to determine which projects will have a positive effect for motorists driving on these crash-prone streets.
“When you consider the impact a daily commute has on a person, it’s not hard to imagine how one small traffic improvement can be a positive change for many,” Alety added. “Our grants signal Allstate’s commitment to reduce risky conditions on America’s roads in communities across the country, but it’s just one piece of the puzzle. We need Congress to pass comprehensive infrastructure reform so we can rebuild a transportation network that ensures a safer future on the roads for everyone.”