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Business Insurance, Business Risk, Cyber Risk, Insurance Industry

The latest reports from FBI and ITRC reveal that cyber incidents in 2023 broke records for financial loss and frequency.

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Cyber incidents reported to the FBI’s Internet Crime Complaint Center (IC3) in 2023 totaled 880,418. These attacks caused a five-year high of $12.5 billion in losses, with investment scams making up $4.57 billion, the most for any cybercrime tracked. Phishing, with 298,878 incidents tracked (down from its five-year high in 2021 of 323,972), continues to reign as the top reported method of cybercrime.

The 2023 Data Breach Report from Identity Theft Resource Center (ITRC) reveals that last year delivered a bumper crop of cybersecurity failures – 3,205 publicly reported data compromises, impacting an estimated 353,027,892 individuals. Meanwhile, supply-chain attacks increased, and weak notification frameworks further increased cyber risk for all stakeholders.

Email compromise, cryptocurrency fraud, and ransomware increase

In addition to record-high financial losses from cybercrimes overall in 2023, the report revealed trends across crime methodology and targets. Investment fraud was the costliest of all incidents tracked. Within this category, cryptocurrency involvement rose 53 percent, from $2.57 billion in 2022 to $3.94 billion. Victims 30 to 49 years old were the most likely group to report losses.

Ransomware rose 18%, and about 42 percent of 2,825 reported ransomware attacks targeted 14 of 16 critical infrastructure sectors. The top five targeted sectors made up nearly three-quarters of the critical infrastructure complaints: healthcare and public health (249), critical manufacturing (218), government facilities (156), information technology (137), and financial services (122).

Adjusted losses for 21,489 business email compromise (BEC) incidents climbed to over 2.9 billion. The IC3 noted a shift from dominant methods in the past (i.e., fraudulent requests for W-2 information, large gift cards, etc.). Now scammers are “increasingly using custodial accounts held at financial institutions for cryptocurrency exchanges or third-party payment processors, or having targeted individuals send funds directly to these platforms where funds are quickly dispersed.”

The report disclosed a $50,000,000 loss from a BEC incident In March of 2023, targeting “a critical infrastructure construction project entity located in the New York, New York area.”

The IC3 says it receives about 2,412 complaints daily, but many more cybercrimes likely go unreported for various reasons. Complaints tracked over the past five years have impacted at least 8 million people. The FBI’s recommendations for solutions to minimize risk and impact include:

  • Ramping up cybersecurity protocols such as two-factor authentication.
  • More robust payment verification practices.
  • Avoiding engagement with unsolicited texts and emails.

The scale of 2023 data compromises is “overwhelming.”

According to the ITRC, the surge in breaches during 2023 is 72 percent over the previous record set in 2021 and 78 percent over 2022. To add more perspective, the ITRC notes that “the increase from the past record high to 2023’s number is larger than the annual number of events from 2005 until 2020, except for 2017.”

Meanwhile, as the report highlights, two other outsized trends converged: increasing complexity and risk. The number of organizations and victims impacted by supply-chain attacks skyrocketed. The notification framework conspicuously weakened, too. Since some laws assign liability for notification to organizations owning the leaked data, the notification chain would stop there, leaving downstream stakeholders unaware. For example, a software company servicing nonprofits might duly notify its direct B2B customers but not the individuals served by the nonprofit organization.

The ITRC has been reviewing publicly reported data breaches since 2005, and it now has a database of more than “18.8K tracked data compromises, impacting over 12B victims and exposing 19.8B records.” This ninth report forecasts a bleak outlook for the coming year. Specifically, “an unprecedented number of data breaches in 2023 by financially motivated and Nation/State threat actors will drive new levels of identity crimes in 2024, especially impersonation and synthetic identity fraud.”

The faster a breach is identified and reported, the faster all potentially affected parties can take measures to minimize impact. However, reporting regulations can vary across jurisdictions and businesses, and their supply chain partners may hesitate to disclose breaches for fear of impacting revenue and brand reputation. ITRC outlines its forthcoming uniform breach notification service designed to enable due diligence, emphasizing swift action and coordination with business and regulatory authorities. The service will be offered for a fee to companies looking to better handle cyber risk in their supply chains and regulatory requirements. Other recommendations include the increased use of digital credentials, facial identification/comparison technology, and enhancing vendor due diligence. 

The increased risk and rising financial losses from cyber risk likely drive growth for the cyber insurance market, which tripled in volume in the last five years. Gross direct written premiums climbed to USD 13 billion in 2022. For a quick rundown of how cyber insurance coverage supports risk management for organizations of all sizes, take a look at our cyber risk knowledge hub. To learn more about the fastest-growing segment of property/casualty, look at our recent Issues Brief.

Coastal Property, Disaster Resilience, Flood Insurance, Floods

Lee County, Fla., Towns Could Lose NFIP Flood Insurance Discounts

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Property owners in Lee County, Fla., could lose their flood insurance premium discounts under the National Flood Insurance Program (NFIP) Community Rating System (CRS), according to a recent announcement by FEMA.

CRS is a voluntary program that recognizes and encourages community floodplain management practices that exceed NFIP minimum requirements.  Over 1,500 communities participate nationwide.

FEMA informed leaders in the affected communities – which include Cape Coral, Bonita Springs, Estero, Fort Myers Beach, and unincorporated Lee County – that they would begin losing their discounts starting October 1. Under CRS, these communities currently receive discounts of up to 25 percent. Unincorporated Lee County and the City of Cape Coral get the biggest benefit due to their Class 5 ratings. Rates will increase by approximately $300 annually for the 115,000 homeowners impacted by FEMA’s decision.

“This retrograde is due to the large amount of unpermitted work, lack of documentation, and failure to properly monitor activity in special flood hazard areas, including substantial damage compliance,” FEMA said in a statement. 

FEMA officials told the Miami Herald that the problems began shortly after Hurricane Ian in 2022, when federal teams visited the communities hit the hardest and looked at the properties they thought were most likely to be substantially damaged, including older homes built in flood zones, some with previous flood damage.

“What the team found, unfortunately, is there was a lot of unpermitted work, lack of documentation,” said Robert Samaan, the regional administrator for FEMA’s Region 4, including Florida. “It was just a failure to properly monitor the activity in the special flood hazard area.”

FEMA shared with the Herald three letters it sent Lee County in 2023 — one in February, one in June and one in December — asking for information on the number of damaged homes and warning that not providing the information could result in the county losing its flood insurance discounts.

In recent months, a number of Florida communities, including Miami-Dade County, have benefited from lower flood insurance premiums as a result of improved CRS scores that reflect resilience-related investment. CRS has become particularly beneficial as NFIP pricing reforms – known as Risk Rating 2.0 –that more closely align premium rates with property-specific risks – have contributed to rising premiums for some property owners. Before these reforms, it was not uncommon for lower-risk owners to be subsidizing higher-risk ones through their premium rates.

Rising NFIP rates have been accompanied by another trend: increased involvement by private insurers in the flood insurance market.

“Florida has the most robust private flood insurance market in the United States, which provides consumers with numerous options for coverage,” said Mark Friedlander, director of corporate communications for Triple-I. “Nearly a third of Florida flood policies are written by private carriers, and many private flood insurers offer better pricing and more robust policies than NFIP. It’s worth taking the time to shop for coverage and obtain multiple quotes.”

As recently as 2018, private insurers provided only 3 percent of flood coverage in Florida.

This growth mirrors a national trend. Between 2016 and 2022 the total flood market grew 24 percent – from $3.29 billion in direct premiums written to $4.09 billion – with 77 private companies writing 32.1 percent of the business, up from 18 companies writing 12.5 percent. Private insurers are accounting for a bigger piece of a growing pie.

Florida’s Office of Insurance Regulation has heavily promoted the availability of private flood insurance in the state over the past several years, and many private flood insurers are domiciled in the state, Friedlander said.

“We are committed to helping these communities take appropriate remediation actions to participate in the Community Rating System again and work towards future policy discounts,” FEMA said in its statement.

Earlier this year, Sea Isle City, N.J., had its Class 3 rating restored after a brief demotion in 2023. Sea Isle City and Avalon are the only towns in the state to have Class 3 ratings.

Learn More:

Coastal New Jersey Town Regains Class 3 NFIP Rating

FEMA Reauthorization Session Highlights Importance of Risk Transfer and Reduction

Miami-Dade, Fla., Sees Flood Insurance Rate Cuts Thanks to Resilience Investment, Thanks to Resilience Investment

Attacking the Risk Crisis: Roadmap to Investment in Flood Resilience

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

Careers and Employment

How Karen Griswold Found Her Path in Chubb Marine Insurance

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By Loretta Worters, Vice President, Media Relations, Triple-I

When Karen Griswold graduated with a B.S. in marketing from Penn State University, her first foray into the business world was to become an executive retail buyer in a large department store.  It didn’t take long before she realized it wasn’t a path for her.

She took an informational interview with someone she knew at the Marine Office of America Corp. who suggested she consider participating in their marine insurance training program. 

“I didn’t have a maritime background, my family didn’t even own a boat, what did I know about marine insurance?” Griswold said.  

“I started as an underwriting trainee assigned to the marine unit,” she explained.  “I did 18 months rotating in inland marine, cargo, hull and marine liability and then generalized insurance training through their professional training program and was assigned to a cargo unit in New York as an ocean cargo underwriter.”

It was a fascinating journey, according to Griswold. 

“As part of the training I learned about mechanical supplies, pharmaceuticals, machinery, and livestock.  There was no box you could put yourself in, it was changing all the time.”

Cargo itself was different, Griswold found she had to have a geopolitical sense. 

“One day China, another day Brazil, and I had to look at how cargo was shipped weighing variables, such as the value of freight, the price of the boat, whether it will operate inland or on the ocean, and the laws and regulations of countries where the vessel might travel,” she said. “It was fascinating.”

Her career spanned everything from cargo to hull and liability to tugboat and marine facilities.  She learned about different classes of marine business, too. 

Thirty years later, Griswold is an executive vice president in Chubb’s Ocean Marine Division, and she still finds she learns something new every day. 

“It’s a vast insurance world, that’s what I find so exciting and interesting, whether it’s the political impacts of shipping, to global trade laws, different issues in distinct ports, it’s constantly changing and evolving,” she said.

In her current role, Griswold overseas it all: ocean marine, hull, cargo, liabilities, and marinas business.  Depending on the day, one might be more interesting than the other. 

“That’s one of the things that challenges me the most in my position.  “I pick up the paper and find out what’s happening in the world, the political complexities, and how that impacts the way we transact business.”

Education is very important to Griswold, which is why she has been involved with the American Institute of Marine Underwriters (AIMU) since the beginning of her career.  She started attending their educational programs as a trainee.  Over the years, she has sat on the hull and finance committees and currently serves as AIMU’s Director of Finances.

“AIMU’s President John Miklus has been a great champion of women, and for the industry in general,” she said.

Griswold also is involved with the International Union of Marine Insurance (IUMI) and sits on their policy forum committee that monitors all the global marine issues impacting the industry. 

“I believe it is a great privilege to be a woman in the maritime industry; there are not a lot of us,” she explained.  “There’s a natural camaraderie between us.  For a while, I was the only woman at various events, different organizations, and committees.  That has changed throughout my career.  It’s an incredible field for people.  The gender diversity has increased over the last couple of years and has been encouraging to see.”

Griswold, who celebrated her twenty-fifth anniversary with Chubb, attributes her success to the mentors and sponsors throughout her career – both men and women. 

“We need to raise women, not only in the marine industry but in business overall,” she said. “Just being a female in a heavily male-dominated group is a challenge.  I’ve been lucky; I’ve been treated fairly, and my experience has largely been positive.  Though it has been challenging as a mother, raising children in a male-driven industry, finding that balance.  But I’ve had a tremendous amount of support.”

Griswold, who spends a fair amount of time sponsoring women inside and outside the industry, noted that more diversity is needed.

“Being a champion is important, to showcase some of that talent,” she said.  “When women see others like them, it’s more empowering to have that bond, that ability to see people like themselves and develop and grow and consider safe spaces.  It’s important to showcase those women and their talent.”

While Griswold didn’t have the benefit of sponsorship among senior women, she did have great male sponsors along the way. 

“Those men helped me find my voice and my path forward,” she said.  “We must help other women to find their voices.  We must help each other, empower ourselves, and not create a competitive environment.”

Griswold pointed to the value of Chubb’s business roundtables, which are employee resource groups that offer mentoring and networking.

“We need to find compatibility, friendship, mentoring groups,” she said. “Women need to forge their career paths and find their niche in this field.  There is strength in numbers.”

Coastal Property, Disaster Preparedness, Disaster Resilience, Flood Insurance

Coastal New Jersey Town Regains Class 3 NFIP Rating

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Sea Isle City, N.J., has regained its Class 3 rating under FEMA’s National Flood Insurance Program (NFIP) Community Rating System (CRS) after a brief demotion last year. Being rated Class 3 enables the coastal town’s property owners to receive a 35 percent discount on their federal flood insurance.

CRS is a voluntary incentive-based program designed to encourage strong floodplain management. Class 1 is the highest rating, enabling residents to obtain a 45 percent reduction in their premiums. Class 10 indicates that a community doesn’t participate in CRS. To date, only two of the 1,500 participating communities nationwide have achieved the highest rating: Tulsa, Okla., and Roseville, Calif.

High ratings are not easy to obtain or maintain. Sea Isle City first reached Class 3 in 2018, and the rating was briefly lowered to Class 4 last year after points awarded to communities after Superstorm Sandy expired. The city quickly regained Class 3 status through additional flood-management activities.

In the mid-1990s, conditions were so bad for Sea Isle City that it was nearly ejected from the NFIP. If this had happened, property owners wouldn’t have had access to federal flood insurance. Neil Byrne, the city’s floodplain manager, construction official, building sub-code official, and zoning officer, attributes the improvement to strengthened zoning ordinances that require structures to be elevated higher than FEMA recommends, as well as investment in berms and bulkheads.

“The history of Sea Isle City going from facing expulsion from the NFIP to now leading the charge in the CRS in New Jersey is truly inspirational,” said Thomas Song, FEMA resiliency specialist.  “What does not get enough attention is that success in the CRS program has to start with a strong understanding of the day-to-day compliance with NFIP requirements. It is extremely difficult to advance in CRS status without a strong foundation in floodplain-management practices.”

Achieving higher CRS rankings has become something of a friendly competition among coastal New Jersey towns, and only one other New Jersey community – Avalon – has a Class 3.

“Both Sea Isle City and Avalon have demonstrated their commitment in planning for future flooding, implementing higher building standards, and engaging in extensive public outreach,” Song said. “These efforts create an environment geared towards reducing flood damage and enhancing the safety and well-being of residents.”

As NFIP – through its Risk Rating 2.0 reforms – attempts to better align premium rates with risk, CRS discounts become even more significant to owners in flood-prone communities.

Last year, 17 Florida jurisdictions achieved Class 3 ratings. In Cutler Bay – a town on Miami’s southern flank with about 45,000 residents – the average premium dropped by $338. Citywide, that represented a savings of $2.3 million. In January 2024, Miami-Dade County became the latest municipality in the flood- and hurricane-prone state to achieve Class 3, leapfrogging from Class 5 due to the county’s flood-mitigation investments.

Meanwhile, back in New Jersey, Byrne says Sea Isle City hopes to become the state’s first Class 2 community.

“It’s very hard to get to the next level,” he said, but adds that flood pumps could help the city over the hump.

“Ninety-nine percent of our flooding is tidal flooding,” Byrne said, referring to inundation that happens during high tide events. “A lot of it goes away on its own, but we have little areas that need help getting the water out.”

About 90 percent of all U.S. natural disasters involve flooding. For decades, NFIP was practically the only available option for homeowners to obtain flood coverage. Before Risk Rating 2.0, however, coverage for higher-risk properties was often unfairly subsidized by lower-risk property owners.

In recent years, improved data, analysis, and modeling have helped drive increased private-sector interest in flood risk. This, combined with the NFIP reforms, should foster a more competitive flood insurance market in which coverage is both more available and more fairly priced.

“Collective responsibility and multi-disciplinary collaboration are necessary to build resilience around climate-related perils like flood,” said Triple-I CEO Sean Kevelighan. “FEMA’s CRS program is just one example of how communities can make themselves safer and save money through targeted investments that reduce the likelihood and size of catastrophic losses.”

 Learn More:

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

FEMA Reauthorization Session Highlights Importance of Risk Transfer and Reduction

Miami-Dade, Fla., Sees Flood-Insurance Rate Cuts, Thanks to Resilience Investment

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

Proposed Flood Zone Expansion Would Increase Need for Private Insurance

Careers and Employment, Insurance Industry

Women are fueling industry prosperity but left out of the C-Suite

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The insurance industry is on track for continued growth, with women playing a huge part, but gender equity at the top remains a long way off.  Bureau of Labor Statistics (BLS) data shows the talent pipeline isn’t an issue, as women account for 59.4 percent of the insurance workforce. They comprise 80.1 percent of workers serving as claims and policy processing clerks, 54.9 percent in sales roles, and 56.9 percent of underwriters. Yet, only about 22 percent (less than 1 in 4) of workers in the C-Suite are women.

Despite the setbacks of the early pandemic years, in which women shouldered the brunt of related workforce losses, women have made up roughly 60 percent of the insurance workforce each year since 2012, exceeding their share of total employment in the U.S. (46.9 percent).

Private sector research adds more details to this stark picture. A Marsh study conducted in 2022 revealed that “25 out of 27 (92.5 percent) of the largest insurance companies were led by men.” Similarly, a McKinsey study showed, “white women make up 45 percent of entry-level roles yet…fewer than one in five direct reports to the CEO are women.” Gender disparities also appear to increase across race and ethnicity.

A recent study from Liberty Mutual and Safeco Insurance shows that the number of women owners or principals in insurance agencies decreased from 31 percent to 26 percent between 2022 and 2023. In contrast, women comprise 75 percent of customer-facing staff in those organizations.

S&P Global Research analysis findings suggest “women could reach parity in senior leadership positions between 2030 and 2037, among companies in the Russell 3000.” Whether that might play out sooner or later for insurance isn’t clear. The August 2023 report also reveals that the “majority of progress towards gender parity is coming from women taking seats on company boards.” Still, C-suite leadership across all industries may not show full gender parity until the 2050s, and “the highest levels in CEO and CFO positions could take even longer.”

Gender parity can offer solutions for a healthy financial future

Meanwhile, the industry expects to face massive attrition as thousands of workers (along with their leadership skills and knowledge) eventually exit the workforce in the coming years. Automation and artificial intelligence/machine learning (AI/ML) may eliminate the need for some roles. Still, insurers will undoubtedly need to maintain an ecosystem of efficiency and innovation to remain profitable. Increased implementation of data-driven processes and decision-making brings new ethical implications and regulatory responsibilities.

Organizational diversity is commonly defined as people from a variety of backgrounds and perspectives working together to solve business problems. Strategic long-term success requires identifying, developing, and promoting diverse talent at all levels. However, a lack of diversity at the C-suite level can undermine the most valiant recruitment efforts in other parts of the organization. Today’s driven and career-focused candidates are wary of glass ceilings and may want evidence that inclusion and equity come from the top.

Research has indicated women in leadership can positively impact the organizations they run. After a series of four studies over several years, findings from McKinsey indicate that “leadership diversity is also convincingly associated with holistic growth ambitions, greater social impact, and more satisfied workforces.” Further, the most recent study also notes the “business case for gender diversity on executive teams has more than doubled over the past decade.” Other research indicates that, among U.S. property-casualty insurance companies, female CEOs are associated with “lower insurer insolvency propensity, higher z-score, and lower standard deviation of return on assets.”

In the era of the nation’s first female vice-president, ultimately, corporate boards might find that reflecting the market demographics the savviest and most compelling of all reasons to diversify senior leadership. Together, U.S. millennials and the oldest Gen Zers (already taking on adult responsibilities) command nearly $3 trillion in spending power each year. Both generations have duly prepared themselves to advance in the workforce, becoming more educated than previous generations. And they will no doubt grab an opportunity where they can find it.

Auto Insurance, Catastrophes, Disaster Resilience, Legal Environment

Auto Insurers Contend With Rising Costs

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By Max Dorfman, Research Writer, Triple-I

Auto premiums continue to increase as rising labor and material prices, alongside natural disasters, are forcing insurers to contend with significant losses.

As  Triple-I previously found in its January report, Insurance Economics and Underwriting Projections: A Forward View, “commercial auto underwriting losses continue, with a projected 2023 net combined ratio of 110.2, the highest since 2017,” according to Jason B. Kurtz, FCAS, MAAA, a Principal and Consulting Actuary at Milliman. Combined ratio is a standard measure of underwriting profitability, in which a result below 100 represents a profit and one above 100 represents a loss. 

Insurers are now having to increase rates in response to losses that are expected to keep rising.

“Nobody wants to have that higher-price bill,” said Sean Kevelighan, Triple-I’s CEO. However, he added companies “need to price insurance according to the risk level that’s out there.”

While inflation is partially to blame for these increases, natural disasters are also contributing to rising costs—and not only in traditionally disaster-prone areas like Florida and California.

As the overall P&C industry has struggled with severe convective storms, hurricanes, and other natural disasters, these losses have also been felt in commercial auto. In fact, 2023 witnessed around two dozen U.S. storms,  each with losses of around a billion dollars or more. This included major lightning, hail, and damaging winds around many areas of the of the U.S.

“While a lot of these storms don’t make national headlines, they do tend to be very costly at the local level,” says Tim Zawacki, principal research analyst for insurance at S&P Global Market Intelligence. “And the breadth of where these storms are occurring is something that I think the industry is quite concerned about.”

While disasters and economic inflation continue to roil commercial auto, so too does social inflation. As the Triple-I previously reported, “social inflation,” which is the presence of inflation in excess of economic inflation, has also significantly contributed to increases in commercial auto premiums.

Triple-I found that “from 2013 to 2022, increasing inflation drove losses up by between $35 billion and $44 billion, or between 19 percent and 24 percent. The pandemic brought significant change to commercial auto liability, decreasing claim frequency while increasing claim severity more dramatically.”

This increased claim severity is at least partially due to changing driving patterns since the pandemic, including distracted driving, which involves behaviors like cellphone use while behind the wheel. A Triple-I Issues Brief, Distracted Driving: State of the Risk, enumerated these concerns, which have undoubtedly played a role in rising commercial auto premiums.

Indeed, a confluence of issues are playing into rising auto premiums. While natural disasters are out of the control of insurance providers and their policyholders, other factors must be addressed to steady the cost of this line of insurance. This includes telematics and usage-based insurance, which has gained more acceptance since the pandemic.

Still, it is incumbent on insurers, policyholders, and policymakers to create a more sustainable market for auto insurance, working together to tackle the challenges of both climate risk and dangerous driving behavior.

Catastrophes, Disaster Preparedness, Disaster Resilience, Flood Insurance, Floods, Homeowners Insurance, Legal Environment, Regulation, Risk Management

Evolving Risks Demand Integrated Approaches

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Even as the Smokehouse Creek Fire – the largest wildfire ever to burn across Texas – was declared “nearly contained” this week, the Texas A&M Service warned that conditions are such that the remaining blazes could spread and even more might break out.

“Today, the fire environment will support the potential for multiple, high impact, large wildfires that are highly resistant to control” in the Texas Panhandle, the service said.

This year’s historic Texas fires – like the state’s 2021 anomalous winter storms, California’s recent flooding after years of drought, and a surge in insured losses due to severe convective storms across the United States – underscore the variability of climate-related perils and the need for insurers to be able to adapt their underwriting and pricing to reflect this dynamic environment. It also highlights the importance of using advanced data capabilities to help risk managers better understand the sources and behaviors of these events in order to predict and prevent losses.

For example, Whisker Labs – a company whose advanced sensor network helps monitor home fire perils, as well as tracking faults in the U.S. power grid – recorded about 50 such faults in Texas ahead of the Smokehouse Creek fires.

Bob Marshall, Whisker Labs founder and chief executive, told the Wall Street Journal that evidence suggests Xcel Energy’s equipment was not durable enough to withstand the kind of extreme weather the nation and world increasingly face. Xcel – a major utility with operations in Texas and other states — has acknowledged that its power lines and equipment “appear to have been involved in an ignition of the Smokehouse Creek fire.”

“We know from many recent wildfires that the consequences of poor grid resilience can be catastrophic,” said Marshall, noting that his company’s sensor network recorded similar malfunctions in Maui before last year’s deadly blaze that ripped across the town of Lahaina.

Role of government

Government has a critical role to play in addressing the risk crisis. Modernizing building and land-use codes; revising statutes that facilitate fraud and legal system abuse that drive up claim costs; investing in infrastructure to reduce costly damage related to storms – these and other avenues exist for state and federal government to aid disaster mitigation and resilience.

Too often, however, the public discussion frames the current situation as an “insurance crisis” – confusing cause with effect. Legislators, spurred by calls from their constituents for lower premiums, often propose measures that would tend to worsen the problem because they fail to reflect the importance of accurately valuing risk when pricing coverage.

The federal “reinsurance” proposal put forth in January by U.S. Rep. Adam Schiff of California is a case in point. If enacted, it would dismantle the National Flood Insurance Program (NFIP) and create a “catastrophic property loss reinsurance program” that, among other things, would set coverage thresholds and dictate rating factors based on input from a board in which the insurance industry is only nominally represented.

U.S. Rep. Maxine Waters (also of California) has proposed a Wildfire Insurance Coverage Study Act to research issues around insurance availability and affordability in wildfire-prone communities. During  House Financial Services Committee deliberations, Waters compared current challenges in these communities to conditions related to flood risk that led to the establishment of NFIP in 1968. She said there is a precedent for the federal government to step in when there is a “private market failure.”

However, flood risk in 1968 and wildfire risk in 2024 could not be more different. Before FEMA established the NFIP, private insurers were generally unwilling to underwrite flood risk because the peril was considered too unpredictable. The rise of sophisticated computer modeling has since given private insurers much greater confidence covering flood (see chart).

In California, some insurers have begun rethinking their appetite for writing homeowners insurance – not because wildfire losses make properties in the state uninsurable but because policy and regulatory decisions made over 30 years ago have made it hard to write the coverage profitably. Specifically, Proposition 103 and its regulatory implementation have blocked the use of modeling to inform underwriting and pricing and restricted insurers’ ability to incorporate reinsurance costs into their premium pricing.

California’s Insurance Commissioner Ricardo Lara last year announced a Sustainable Insurance Strategy for the state that includes allowing insurers to use forward-looking risk models that prioritize wildfire safety and mitigation and include reinsurance costs into their pricing. It is reasonable to expect that Lara’s modernization plan will lead to insurers increasing their business in the state.

It’s understandable that California legislators are eager to act on climate risk, given their long history with drought, fire, landslides and more recent experience with flooding due to “atmospheric rivers.” But it’s important that any such measures be well thought out and not exacerbate existing problems.

Partners in resilience

Insurers have been addressing climate-related risks for decades, using advanced data and analytical tools to inform underwriting and pricing to ensure sufficient funds exist to pay claims. They also have a natural stake in predicting and preventing losses, rather than just continuing to assess and pay for mounting claims.

As such, they are ideal partners for businesses, communities, governments, and nonprofits – anyone with a stake in climate risk and resilience. Triple-I is engaged in numerous projects aimed at uniting diverse parties in this effort. If you represent an organization that is working to address the risk crisis and your efforts would benefit from involvement with the insurance industry, we’d love to hear from you. Please contact us with a brief description of your work and how the insurance industry might help.

Learn More:

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

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

Triple-I “Trends and Insights” Issues Brief: California’s Risk Crisis

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

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

Tamping Down Wildfire Threats

Insurance Industry

Will the D&O market conditions remain favorable? Allianz report says 2024 will bring its share of challenges.

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Several global challenges pose a significant threat to maintaining soft market conditions for Directors and Officers (D&O) liability coverage, according to the most recent report on the sector by Allianz.

A list of salient risks and trends to monitor during 2024 spans various areas, including:

  • Macroeconomics,
  • Geopolitical,
  • Generative AI (GenAI),
  • Environmental, Social, and Governance (ESG), and
  • Class action filings and third-party litigation funding.

According to the latest edition of Directors and Officers Insurance Insights, any of these factors could change the outlook for a competitive market this year.

The D&O market may have mostly avoided the bumps and scrapes faced by other lines of coverage in 2023. With double-digit decreases in insurance pricing worldwide, new market entrants, favorable loss ratios, and a reduction in the Initial Public Offerings (IPOs), the environment contrasts sharply with the early pandemic years of 2020 and 2021. Over 90 percent of D&O underwriters (in a separate study) expected pricing to decrease or stay the same for mature public companies in 2024.

However, Allianz (in conjunction with Munich Re) predicted business insolvencies may rise by 10 percent in 2024. In today’s dynamic environment, organizations — from startups to multi-national behemoths — may rely on D&O policies to manage liabilities arising from executive leadership decisions. Having coverage in place signifies attention to the bottom line and removes a barrier to recruiting the best leadership talent.

The 2023 economy delivered many hurdles, particularly in rising costs and interest rates, rendering the effective management of capital expenditure[DJ1]   and debt a cryptic challenge for organizations and their executives. Add to that mix insolvency activity that is starting to look similar to what followed the 2009 global financial crisis. The “likelihood of a recession in the US and UK continues to rise in 2024,” the report says.

Citing Fitch’s analysis, the report warns of threats to future profitability from “weaker pricing and the potential claims volatility from a myriad of sources.” Still, Allianz suggests that reserves from most recent years may safeguard “near-term underwriting results.”

The early 2023 banking crisis is expected to leave a mark on the D&O segment as each of the bank failures and near failures – widely attributed to substandard banking practices – resulted in a securities fraud claim. The forecasted multi-billion dollar losses in market cap and final disclosure pose an enormous threat to insurance towers, the layers of coverage spreading risk across multiple insurers and coverage levels to diversify overall risk exposure. Consequently, the report advises closely monitoring banks with large commercial property portfolios and how the Treasury plans to rebuild its cash balance from the lowest level in seven years.

The report discusses how technology advancements offer a mixed bag for the D&O segment, creating advantages for organizational efficiency and productivity but also new risks surrounding cybersecurity, regulatory requirements, transparency and governance, litigation, and investor expectations. Cybersecurity, in general, has been on the radar for several years now. However Generative AI (GenAI), a relatively new technology in the risk management spotlight, could enable more threats for cyber risk management.

Separately, Gen AI has already sparked intellectual property and privacy claims. Future claims could emerge in securities, breach of fiduciary, shareholder, and derivative lawsuits. The report states that managing risks posed by Gen AI requires the cultivation of expertise-driven best practices and protocols.

Another 21st-century issue, Environmental, Social, and Governance (ESG), appears to have permanently taken root as a factor in the D&O risk landscape. Despite the ongoing debate over its value, definition, and measurement, the ESG framework encompasses a growing list of conundrums faced by directors and officers. Organizations don’t operate in a vacuum but in communities where human rights, climate risk, and other ESG concerns can infiltrate business-as-usual operations. Tactics that avoid or incur costly regulatory sanctions can also spark lawsuits from private stakeholders.

“In a world that is becoming increasingly polarized politically and socially, the very need for directors to evaluate and address the impact of various ESG factors on corporate value creates that claims will be made…on either or both sides of any given issue,” the report states.

The specter of increased litigation costs persists as federal securities class actions climbed to 201 by early December in 2023 (up from 197 in 2022) and total settlement dollars outpaced historical levels. Figures for only the first half of 2023 exceeded the total for 2022, climbing to a ten-year record high.

The D&O segment has always been dynamic, and claims can arise from various sources, including shareholders, employees, regulatory agencies, competitors, and customers. Therefore, the product continues to play a vital role in mitigating the risks associated with corporate governance and protecting the interests of directors, officers, and the companies they serve. Overall, the market’s future will remain competitive as established insurers move to address underwriting challenges, but it’s not likely that the 2024 environment will be hospitable to new insurers lacking a substantial portfolio.

Catastrophes, Disaster Preparedness, Disaster Resilience, Insurers and the Economy, Regulation, Risk Management

NAIC, FIO to Collaborate on Data Collection Around Climate Risk

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When the U.S. Treasury Department’s Federal Insurance Office (FIO) announced in December 2022 that it was considering a new data-reporting mandate for certain property/casualty insurers, it raised red flags for insurers and policyholders.

In response to a request for comments on the proposed data call, Triple-I told FIO 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.”

In its own response, the National Association of Insurance Commissioners (NAIC) emphasized the importance of collaboration with the industry to avoid such unintended consequences.

“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.”

FIO has listened and responded appropriately. The agency has abandoned its plan to gather data on home insurance rates and availability in high-risk states. Instead, NAIC announced that it has implemented a nationwide Property & Casualty Market Intelligence Data Call (PCMI) in collaboration with FIO.

“The PCMI data call represents the collaborative, nonpartisan work that state insurance regulators have undertaken through the NAIC to address the critical challenge of the affordability and availability of homeowners’ insurance and the financial health of insurance companies,” said NAIC president Andrew Mais, who also serves as Connecticut’s insurance commissioner.

The change in approach is important both on its own merits – in ensuring that FIO obtains the information it needs without excessively and unnecessarily burdening the insurance industry – and in the recognition it reflects that federal actions affecting the insurance industry should involve the industry. For example, legislation proposed by U.S. Rep. Adam Schiff earlier this year to create a federal “catastrophe reinsurance program” raises several concerns that warrant scrutiny and discussion – not the least of which is that it would set coverage thresholds and dictate rating factors based on input from a board in which the insurance industry is only nominally represented.

“Triple-I commends the decision by FIO and NAIC to collaborate on a joint comprehensive property/casualty insurance data call to gather insights into the dramatic changes we’re seeing in the insurance marketplace,” said Triple-I CEO Sean Kevelighan. “Insurance companies are committed to finding solutions for how we can predict and prevent property damage from natural disasters, as well as keeping costs of coverage at competitive levels. Data calls are time-consuming and expensive. A unified collection of data will help make this a more efficient process.”

Learn More:

Federal “Reinsurance” Proposal Raises Red Flags

FEMA Reauthorization Session Highlights Importance of Risk Transfer and Reduction

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

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

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

Complex Risks in a Complicated World: Are Federal Backstops the Answer?

Triple-I Responds to SEC’s Proposed Climate-Risk Disclosure Requirements

Triple-I CEO: Insurance Leading on Climate Risk

Auto Insurance, Catastrophes, Disaster Resilience, Earthquakes, Floods, Homeowners Insurance, Industry Financials, Insurers and the Economy

Calif. Risk/Regulatory Environment Highlights Role of Risk-Based Pricing

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Even as California moves to address regulatory obstacles to fair, actuarially sound insurance underwriting and pricing, the state’s risk profile continues to evolve in ways that underscore the importance of risk-based insurance pricing and investment in mitigation and resilience.

Triple-I’s latest “State of the Risk” Issues Brief discusses this changing risk environment and the impact of Proposition 103 – a three-decades-old measure that has made it hard for insurers to profitably write coverage in the state. In a dynamically evolving risk environment that includes earthquakes, drought, wildfire, landslides, and — in recent years, due to “atmospheric rivers” — damaging floods, Proposition 103 has prevented insurers from using the most current data and advanced modeling technologies. Instead, it has required them to price coverage based on historical data alone.

It also has restricted accurate underwriting and pricing by not allowing insurers to incorporate the cost of reinsurance into their pricing. Insurers use reinsurance to maximize their capacity to write coverage, and reinsurance rates have been rising for many of the same reasons as primary insurance rates. If insurers can’t reflect reinsurance costs in their pricing – particularly in catastrophe-prone areas – they must pay for these costs from policyholder surplus, reduce their market share in the state, or do both.

Proposition 103 also has impeded premium rate changes by allowing consumer advocacy groups to intervene in the rate-approval process. This makes it hard to respond quickly to changing market conditions, resulting in approval delays and rates that don’t accurately reflect current (let alone future) risk. It also drives up legal and administrative costs.

This has led, in some cases, to insurers deciding to limit or reduce their business in the state. With fewer private insurance options available, more Californians are resorting to the state’s FAIR Plan, which offers less coverage for a higher premium.

This isn’t a tenable situation.

In September 2023, California Insurance Commissioner Ricardo Lara announced a Sustainable Insurance Strategy for the state that includes allowing insurers to use forward-looking risk models that prioritize wildfire safety and mitigation and include reinsurance costs into their premium pricing. In exchange, insurers must cover homeowners in wildfire-prone parts of the state at 85 percent of their statewide coverage.

Issues around property insurance affordability are not confined to California. They’ve been a long time in the making, and they won’t be resolved overnight.

“Any sustainable solutions will have to rest on actuarially sound underwriting and pricing principles,” the Triple-I brief says. “Unfortunately, too often, the public discourse frames the risk crisis as an `insurance crisis’ – conflating cause with effect. Legislators, spurred by calls from their constituents for lower insurance premiums, often propose measures that would tend to worsen the problem because these proposals generally fail to reflect the importance of accurately valuing risk when pricing coverage.”

California’s Proposition 103 and the federal flood insurance program prior to its Risk Rating 2.0 reforms are just two examples, according to Triple-I.

Learn More:

Triple-I Issues Brief: Wildfire

Triple-I Issues Brief: Flood

Triple-I Issues Brief: Risk-Based Pricing of Insurance

How Proposition 103 Worsens Risk Crisis in California

Is California Serious About Wildfire Risk?

Dear California: As You Prep for Wildfire, Don’t Neglect Quake Risk

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