Property/casualty insurers have a powerful interest in mitigating climate-related risk and promoting investment in resilience. The industry is uniquely qualified to help address these perils, but traditional risk-transfer mechanisms on their own are no longer sufficient. Collective responsibility and a multi-disciplinary approach are needed for predicting and preventing catastrophic losses.
That’s why Triple-I’s first-ever “Attacking the Risk Crisis” Town Hall is focused on climate-related perils. The one-day event – being held on November 30, 2023, at the Mayflower Hotel in Washington D.C. – will feature three moderated discussions among private-sector innovators, government, academia, and other stakeholder groups whose engagement is necessary to drive resilience investment and behavioral change.
“Climate risk alone is a formidable adversary,” said Triple-I CEO Sean Kevelighan, noting that insured losses related to natural disasters have increased tenfold since the 1980s. “Resource constraints, legal system abuse, economic pressures, and political intricacies further complicate matters.”
Triple-I has long been a participant in the climate-risk conversation, and this Town Hall is part of its effort help turn these discussion into action. It recently played a key role in a project with the National Institute of Building Sciences (NIBS) to develop a roadmap for stakeholders in flood-risk management to drive investment in mitigation and resilience.
In the same spirit as the NIBS project, Triple-I is holding this Town Hall to reach across the barriers that often separate sectors that would benefit from investing in resilience to different degrees and in different stages of the value-creation chain.
“Aligning incentives for these diverse co-beneficiaries of resilience investment is a key hurdle to be cleared,” Kevelighan said. “Triple-I’s subject-matter experts have been speaking and publishing on these topics for years. But our industry can’t do it alone.”
The first panel – Climate Risk Is Spiraling – What Can Be Done? – will be moderated by David Wessel, senior fellow in Economic Studies at the Brookings Institution and director of the Hutchins Center on Fiscal and Monetary Policy. This panel will discuss the current state of climate risk and share their insights as practitioners and thought leaders.
The second – Innovation, High- and Low-Tech: How Insurers Are Driving Solutions – will be moderated by Jennifer Kyung, vice president and chief underwriter for USAA, and focus on how the tools, techniques, and strategies insurers are bringing to bear on these complex and costly challenges.
And the third – From Outdated Regs to Legal System Abuse: It Will Take Villages to Fix This – will be moderated by Zach Warmbrodt, financial services editor at Politico, and panelists will delve into the legal and public policy considerations that need to be addressed to move the needle on climate resilience.
Solution-focused and organized with an eye toward driving positive action across stakeholder groups, this event is an opportunity to meet and interact with people who are doing the work and developing the strategies and tactics. Hear and share insights and – perhaps most important – get involved in the attack on the risk crisis.
You can register and check out the agenda and speaker profiles here.
Severe convective storm losses—the highest in decades—significantly affected the 2023 net combined ratio for the property/casualty industry, according to the latest underwriting projections by Triple-I and Milliman actuaries.
The 2023 net combined ratio is now forecast to be 103.8, with hard markets continuing the net written premium growth, forecast at 8.3 percent. 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.
The quarterly report, Insurance Economics and Underwriting Objections: A Forward View, was presented on November 2 at a members only briefing moderated by Triple-I CEO Sean Kevelighan. Members can access the briefing replay by contacting members@iii.org for instructions.
Dale Porfilio, FCAS, MAAA, Chief Insurance Officer of Triple-I, discussed the overall P&C industry underwriting projections.
“We forecast personal lines to improve each year from 2023 through 2025, but still lag behind strong underwriting profitability in commercial lines,” he said. He also noted that the improvements are expected to result in “the overall P&C industry returning to a small underwriting profit in 2025.”
On personal auto, Porfilio forecast premium growth of 11.0 percent in 2023 as rate increases start to exceed loss trends, allowing the 2023 net combined ratio to improve incrementally to 110.5 from 112.2 in 2022.
“Costlier replacement parts and low inventories are contributing to current and future loss pressures,” Porfilio said, adding, “unless replacement cost begins to decrease materially—which is not currently forecast—we project personal auto to remain at an underwriting loss through 2025.”
Looking at commercial property, the 2023 net combined ratio is forecast at 91.6, nearly identical to 2022.
“Hard market conditions continue into 2023, most notably in catastrophe-prone regions,” said Jason Kurtz, a principal and consulting actuary at Milliman—an independent risk-management, benefits, and technology firm said. “We expect premium growth to moderate through 2025.”
Kurtz also discussed commercial auto, predicting that underwriting losses will continue, with first-half 2023 direct incurred loss ratios at the highest in at least 15 years.
“There will be a continued need for rate to improve the combined ratio results,” Kurtz said, adding, “We are forecasting the 2023 combined ratio at 106.7 percent, 2024 at 103.4 percent and 2025 at 102.7 percent.”
Michel Léonard, PhD, CBE, Chief Economist and Data Scientist at Triple-I, discussed key macroeconomic trends impacting the property/casualty industry results including inflation, increasing interest rates and overall economic underlying growth.
“P&C growth has improved in 2023, growing 1.3 percent versus 2.1 percent for overall GDP. While many hurdles could derail such improvements, P&C underlying economic growth is currently positioned to increase faster than overall GDP by 2.6 percent versus 1.7 percent in 2024 and by 4.5 percent versus 2.0 percent in 2025,” Léonard explained.
Léonard noted that top risk scenarios for 2024 include geopolitics, weaking employment, and GDP contraction. “The Fed may also keep increasing rates into 2025, pushing down home and auto insurance underlying economic growth.”
Donna Glenn, Chief Actuary at the National Council on Compensation Insurance (NCCI), also shared preliminary numbers for 2023 on workers compensation premium, payroll, and underwriting profitability. She noted that premium increased 11 percent in 2022, returning to near the pre-pandemic levels of 2019. Glenn also indicated that the 2023 combined ratio should be very similar to 2022, resulting in a full decade of workers comp calendar-year combined ratios under 100 percent.
“All in all, the results for the first half of 2023 are remarkably stable,” she said. “I want to be clear—we continue to be vigilant in monitoring results and trends.”
Want to know more about the risk crisis and how insurers are working to address it? Check out Triple-I’s upcoming Town Hall, “Attacking the Risk Crisis,” which will be held Nov. 30 in Washington, D.C.
The IRC report, Uninsured Motorists: 2017—2022, which used data from 10 insurers representing around 56 percent of the U.S. private passenger auto insurance market, found that the percentage of uninsured motorists been rising over the past few years. Indeed, the percentage of uninsured motorists was 11.1 percent in 2019, increased to 13.9 percent in 2020, and stood at 14.2 percent in 2021, before the slight decline in 2022.
The report posits that declining personal income and rising inflation – particularly during the first two years of the coronavirus pandemic – led some motorists to forgo purchasing mandatory auto insurance liability coverage. This shift was particularly apparent during the first two years of the coronavirus pandemic. In fact, before the pandemic, the number of uninsured U.S. drivers was largely declining, with 40 jurisdictions experiencing decreases from 2017-2019. The largest decrease was in Montana, where the percentage of uninsured drivers on its roadways fell by 4.1 percent during the three-year timeframe.
This, however, was not uniform across the country. The largest percentage increases during the same period were seen in Florida and Michigan. Michigan’s 2019 legislative reform greatly helped alleviate the situation; the state experienced a 6.2 percent decline from 2020-2022.
In 2022, the District of Columbia (25.2 percent), New Mexico (24.9 percent), and Mississippi (22.2 percent) had the highest percentages of uninsured motorists in 2022. Wyoming (5.9 percent), Maine (6.2 percent), and Idaho (6.2 percent) were the three states with the lowest percentage.
Uninsured motorists impose costs for insurers, state governments, and taxpayers. Auto insurers are required by law to underwrite uninsured and underinsured driver coverage and process these claims, as well as complying with regulations in many states requiring insurers to inform the state when auto insurance coverage is canceled. State governments also administer taxpayer-funded programs that monitor the insurance status of motor vehicles registered in the state.
By Scott Holeman, Director, Media Relations,Triple-I
To amplify the Insurance Information Institute’s (Triple-I) commitment to Diversity, Equity, and Inclusion (DEI) in the workplace, Triple-I partnered with HBCU IMPACT®, whose mission is to increase the number of Black professionals in the insurance, risk management, financial services, and legal industries. The first step in attracting new, diverse talent is to raise awareness about the sector’s viability and vast opportunities for rewarding careers.
A logical place to engage new talent is on college campuses, where many students are still making up their minds about what kind of careers they should pursue. HBCU IMPACT® not only develops and mentors students through a variety of programs and initiatives, but it has also created the HBCU IMPACT® Incubator. This innovative initiative helps students gain insurance credentials and licenses before they graduate, giving them a head start in their search for jobs.
Symira Goodwin attended Bethune-Cookman University and now works at American Express.
Roschinael Pierre Lewis attended Florida Memorial University and is currently interning for the National Basketball Association.
Symira and Roschinael are both HBCU IMPACT® success stories. Each of them received insurance adjuster’s licenses while still in college.
By Loretta Worters, Vice President – Media Relations, Triple-I
Financial abuse occurs in 98 percent of abusive relationships and is the number one reason victims stay in or return to abusive relationships, according to the Center for Financial Security at the University of Wisconsin – Madison. Financial security and access to resources can make all the difference to domestic violence victims when deciding to leave an abusive relationship — yet 78 percent of Americans don’t recognize financial abuse as domestic violence.
Insurance is an important part of financial planning that can help survivors move forward.
The forms of financial abuse may be subtle or explicit. They include concealing information, limiting the victim’s access to assets, or reducing accessibility to family finances. Financial abuse – along with emotional, physical, and sexual abuse – includes behaviors to intentionally manipulate, intimidate, and threaten the victim and entrap them in the relationship. In some cases, financial abuse is present throughout the relationship and in others it becomes present when the survivor is trying to leave or has left the relationship.
In support of Domestic Violence Awareness Month, Triple-I offers financial strategies to protect victims before and after leaving an abusive relationship. They include securing financial records, knowing where the victim stands financially, building a financial safety net, making necessary changes to their insurance policies, and maintaining good credit.
The National Coalition Against Domestic Violence (NCADV) reports that 10 million people are physically abused by an intimate partner each year, and 20,000 calls are placed to domestic violence hotlines each day. In addition, 85 percent of women who leave an abusive relationship return because of their economic dependence on their abusers. Furthermore, the degree of women’s economic dependence on an abuser is associated with the severity of the abuse they suffer.
Ruth Glenn, who currently serves as president of Public Affairs for NCADV and has advocated —professionally and personally — for many policies, including reauthorizing the Violence Against Women Act and legislation involving the intersection of firearms and domestic violence. She noted that “the NCADV’s partnership with the insurance industry, and Triple-I in particular, is critical to developing tools and resources for victims and survivors of domestic violence.”
One example of insurers that are developing such tools is The Allstate Foundation, which has been committed to ending domestic violence since 2005 through financial empowerment by helping to provide survivors with the education and resources needed to achieve their potential and equip young people with the information and confidence they need to help prevent unhealthy relationships before they start. The foundation offers a Moving Ahead Curriculum, a five-module program that helps prepare survivors as they move from short-term safety to long-term security. Modules of the curriculum include:
Understanding financial abuse;
Learning financial fundamentals;
Mastering credit basics;
Building financial foundations; and
Long-term planning.
“One of the most powerful methods of keeping a survivor trapped in an abusive relationship is not being able to support themselves financially,” said Glenn, who is author of the memoir, Everything I Never Dreamed, which chronicles her own domestic violence experiences.
“That’s why insurance and financial education are so important,” she said. “Education can save a life.”
By Kelley Collins, Director of Business Development and Communications, Lightning Protection Institute
Our lives are filled with risk assessment and mitigation. From grabbing an umbrella for a rainy day to stocking up on supplies for an impending natural disaster, we assess and measure the potential risks before an event occurs to be prepared and protect ourselves from unwanted consequences.
For many, however, assessing and mitigating lighting risk isn’t necessarily top of mind. We know lightning is going to strike – more than 31 million cloud-to-ground strikes occur annually. But being personally affected seems so unlikely that people may think preparation isn’t necessary or even possible. Understanding how to mitigate risks associated with lightning is essential to individuals and property owners.
Lightning strikes about 100 times every second. Incorporate assessment of lightning risk into our daily lives.
Impact of Lightning: Homes, Businesses, Critical Facilities
About 6,000 times a minute, there is a lightning strike that contains an electrical discharge hotter than the sun. One strike can cause immense damage that goes beyond fire. The damage to the electrical infrastructure and the electronics connected to that infrastructure can be destroyed – bringing communication, security and productivity to a halt.
Convective storms – which are associated with thunder, lightning, and other weather changes – caused $38 billion in insured losses in the first half of 2023.
“Assessing your risk to lightning before a storm enables homeowners and business owners to predict and mitigate their risks to losses due to a lightning strike,” said Triple-I CEO Sean Kevelighan.
If any of the following structures are hit by lightning, there are consequences beyond the repairs from a fire. When there are surges and/or damages to the electrical system, here are just a few consequences that impact time, money, and – in the worst cases – can cost lives:
Homes: Costly repairs and equipment replacement (TVs, washer/dryer, computers);
Businesses: Emails and communication stopped, production downtime and loss of revenue; and
Critical Facilities: Inability to meet the emergencies of individuals or the community.
Lightning protection systems are scientifically proven to mitigate these risks. When properly installed, a lightning protection system makes a building resilient to the damage of lightning strike. These systems protect the structure, the electrical system, and the humans within the building.
Lightning risk assessment
From homeowners to design/build experts, learning how to measure and mitigate the risks of lightning is vital to the prevention of lightning damage. For personal safety, assess the current and future weather conditions; if you see lightning, get indoors. For protecting homes, buildings, and structures, there are a few ways to conduct an assessment to determine the risks of lightning. If the assessment determines that there are perceived risks of lightning, lightning protection systems can be installed to mitigate those risks.
Key assessment factors
The NFPA 780 standard for lightning protection is one option that offers a simple and complex approach to assessments. At the advanced level, an assessment involves a complex equation with several variables (ie., Nd= Ngx Aex C1 x10-6). At the very least, consider the key assessment factors within three general areas of a structure:
External criteria
Structure, design, and use
Internal activity
External Criteria
When you first walk up to a building or structure, scan the surroundings and conduct a visual inspection. This involves identifying potential lightning strike paths, such as tall trees, antennas, or nearby structures. Evaluate the building’s height and design. Now, assess how that structure compares to other buildings or objects near it.
Is it the tallest building?
Is it situated on a hill or by itself?
If you are designing a new building, assess how that building will be incorporated into these surroundings to ensure proper consideration for making that building more sustainable to a lightning strike.
What is the propensity for lightning strikes in that city, county, or state? Different regions have varying levels of lightning activity, and this information is crucial in determining the necessary level of protection. Lightning frequency data can be obtained from local weather services or scientific experts, such as Vaisala, who collect data on lightning activity.
Structure Design and Use
Evaluate the materials and use of the building.
What are the building materials: Glass, wood, brick, etc.?
Does the design impact the propensity for a lightning strike: Taller points or roof attachments?
What is the use of the building:
Does it contain hazardous or flammable objects?
Does it store valuable and/or historical objects?
Does it perform critical services?
Internal Activity
Identify people and activity on the inside of the structure.
Are there many people inside this structure?
What’s the likely panic level if a building evacuation is necessary?
Can the people move quickly? For instance: In a nursing home or hospital, all occupants cannot quickly exit a building that was hit by lightning. In a large high-rise with large groups of occupants, a speedy exit may not be possible.
What is the building’s function? Identify the services that are being conducted in that building. If lightning hits the structure you are assessing, what happens to the people and services inside? Here are some key structures to protect in high-risk areas:
Data centers
Distribution centers
Schools and churches
Public works facilities
Critical facilities, such as fire, police, hospitals, emergency operation centers
Assessment leads to mitigation and protection. Having a general understanding of a lightning risk assessment enables all of us to make better choices. Individuals and homeowners can protect themselves and their homes. Design/build experts and facility managers can make choices to ensure their buildings are more resilient, sustainable, and safer with lightning protection systems.
Proper steps for a formal assessment and installation
If your general assessment leads you to question the structure’s vulnerability, the NFPA 780 guidelines specify that the formal assessment process should be carried out by qualified professionals who are knowledgeable about lightning protection systems. These professionals may include lightning protection system designers, engineers, or certified installers who have undergone specific training and have a comprehensive understanding of the guidelines.
By following the lightning assessment process outlined by NFPA 780, property owners can ensure that their lightning protection systems are properly designed, installed, and maintained. Proper installation protects structures from the devastating effects of lightning strikes and promotes the safety of individuals inside.
The insurance industry’s shift from assessing and pricing risks to predicting and preventing losses – thereby improving insurance availability and affordability – is well underway. Even a casual look at the trade press reveals insurers adopting technologies and data-driven strategies that help businesses, families, and communities improve their risk profiles.
This data-driven movement does more than simply contain insurance costs – it’s driving improved customer engagement, affinity, and retention and creating opportunities beyond the transactional. Data clarity is crucial for all stakeholders, from insurers to first responders utilities, policymakers and – most important – homeowners. Accurate data enables proactive measures that can prevent fires from happening.
We’re seeing this with our insurance IoT offering, Ting. Ting prevents home fires by identifying unique signals generated by tiny electrical arcs, the precursors to imminent fire risks. These signals are incredibly small but are clearly visible to Ting’s advanced detection technology. Ting has been found to prevent 80 percent of home electrical fires – and, beyond its ability to predict and prevent, we have found that Ting holds even greater significance for organizations that want to bring greater clarity and value to their current data ecosystems.
Over the past few years, we’ve built the world’s most knowledgeable electrical fire prevention team, which has been instrumental in the evolution of Ting’s machine learning and AI. Our Fire Safety Team has found that existing electrical fire data, while helpful and directional, needs greater accuracy and completeness. This is not due to a lack of care. We’re talking about an exceptionally hard problem – codifying fires after the fact. It is at this critical point where data from IoT devices like Ting becomes indispensable.
More than 50 percent of insurance claims for fire are often coded in the “unknown/underdetermined” category. Of these, fire chiefs and forensic fire engineers suggest more than half are likely electrical-related, but lack of resources prevent them from determining exact causation beyond a reasonable doubt, so they simply default to “unknown.” Ting data continues to document important and first of its kind findings around the origin of electrical fires.
Our ‘why’ behind predict and prevent
A horrific loss from an electrical fire in my family prompted the question: “Why can’t faults be identified well before they can evolve into a fire?”
Electricity is one of the most dangerous forces in nature, yet one of our most critical resources; our growing reliance poses increasing risks to homes, businesses, and communities. Recent U.S. Fire Administration data reveals a sobering trend. The 10 years from 2012 through 2021 saw reduced cooking, smoking, and heating fires; however, in stark contrast, electrical fires saw an 11 percent increase over that same period. Fire ignitions with an undetermined cause increased equally by 11 percent.
Our pursuit to address these trends has brought us and our insurance partners here: Nearly 400,000 home-years of data, 6,000 remediated hazards; an insurance-forward IoT and telematics platform with full turnkey delivery; and most notably, hundreds of thousands of customers thrilled that their insurance company is doing more for them than reactively paying claims.
Beyond the home’s walls
But Ting’s value is not limited to inside the home. While every Ting sensor is monitoring each home’s electrical activity to help predict and prevent fires, collectively the Ting network is aggregating data from across the broader utility grid. Specifically, it can help predict and prevent faults on the grid, enabling operators to proactively address risks that might otherwise lead to catastrophic, loss-generating events like wildfires.
Data drives insights
Given that many electrical-related fires are coded not as electrical but as “unknown” in fire incident databases, we’ve learned that comparing “prevented fires” to claims after a fire must consider a broader set of fire claims across a book of business, not just those with a secondary cause of “electrical.” All unknown fires and any claim that could even be electrical-related should be included in the broader set of claims. Excluding claims that can reasonably and accurately be removed — such as arson, lightning, earthquakes, and wildfire-related home fires — the data reveals a one-third reduction in the broader category of fires across the “Ting cohort” versus the “non-Ting cohort.” This results in a strong ROI for insurers.
Beyond prevention metrics, we’ve learned a lot, and Ting continues to learn daily and provide statistically significant actuarial impacts. With fully documented and mitigated hazards identified in 1 in 68 homes, the cases – or “saves” – are documented in detail in a peer-reviewed whitepaper, the latest version published on June 1, 2023. By design, each identified and remediated hazard is carefully reported through a highly standardized process to ensure high-quality, consistent data.
Upon analyzing this statistically significant data, a recurring theme surfaced: The longstanding perception of the electrical fire problem requires new thinking. Below, I highlight three surprising, objective observations revealed by Ting data that support this notion:
There is a common misconception that electrical fires are largely due to older home wiring infrastructure. Yet, we have found that 50 percent of home electrical fire hazards stem from failing or defective devices and appliances, with the other half attributed to home wiring and outlets. This finding is reflected in the chart below, breaking down the location and types of home electrical fire hazards, with a breakout of those stemming from devices and appliances.
What may seem more surprising is that the electric utility grid can be a significant fire risk factor inside the home – not just a community fire risk. Nearly 50 percent of all hazard cases trace back to a root cause outside the house in the form of a grid equipment fault. These faults result in dangerous power entering the home. These conditions endanger a home and its occupants and can cause a shock hazard, damage equipment, and sensitive electronics, and worse, ignite a fire. Utility repair crews often share that a hazard impacted multiple homes in the immediate area, not just the home protected by Ting.
One last finding that runs counter to conventional thinking about electrical fire risk comes in the form of a home-age “bias.” Logically, most of us assume the older the home, the higher the risk. In general, this holds when considering the effects of age and use on existing wiring infrastructure – all other things being equal. However, this assumption falls apart when considering all other factors, such as materials, build quality, and the standards and codes at that time. In fact, with the prevention data that flows in each day from our Fire Safety Team, we have built predictive models for home fire risk; early indications are that these models are demonstrating skill and will lead to a better, more informed view of risk – and of course – even better prevention.
I’m amazed at how our initial objective preventing residential fires has evolved to take on such a broad scope. New data spawns new thinking and new opportunities. Objective data is essential to validating the efficacy of any initiative seeking to prevent losses. Predicting and preventing fires is in the interest of all – especially homeowners and their families.
The Colorado Division of Insurance’s recent adoption of regulations to govern life insurers’ use of any external consumer data and information sources is the first step in implementing legislation approved in 2021 aimed at protecting consumers in the state from insurance practices that might result in unfair discrimination.
Property/casualty insurers doing business in Colorado should be keeping an eye on how the legislation is implemented, as rules governing their use of third-party data will certainly follow.
The implementation regulations, which have been characterized as a “scaling back” of a prior draft release in February, require life insurers using external data to establish a risk-based governance and risk-management framework to determine whether such use might result in unfair discrimination with respect to race and remediate unfair discrimination, if detected. If the insurer uses third-party vendors and other external resources, it is responsible under the new rules for ensuring all requirements are met.
Life insurers must test their algorithms and models to evaluate whether any unfair discrimination results and implement controls and process to adjust their use of AI, as necessary. They also must maintain documentation including descriptions and explanations of how external data is being used and how they are testing their use of external data for unfair discrimination. The documentation must be available upon the regulator’s request, and each insurer must report its progress toward compliance to the Division of Insurance.
The revised draft no longer focuses on “disproportionately negative outcomes” that would have included results or effects that “have a detrimental impact on a group” of protected characteristics “even after accounting for factors that define similarly situated consumers.” Removing that term altogether, the revised draft shifts focus to requiring “risk-based” governance and management frameworks.
This change is significant. As Triple-I has expressed elsewhere, risk-based pricing of insurance is a fundamental concept that might seem intuitively obvious when described – yet misunderstandings about it regularly sow confusion. Simply put, it means offering different prices for the same level of coverage, based on risk factors specific to the insured person or property. If policies were not priced this way – if insurers had to come up with a one-size-fits-all price for auto coverage that didn’t consider vehicle type and use, where and how much the car will be driven, and so forth – lower-risk drivers would subsidize riskier ones.
Risk-based pricing allows insurers to offer the lowest possible premiums to policyholders with the most favorable risk factors. Charging higher premiums to insure higher-risk policyholders enables insurers to underwrite a wider range of coverages, thus improving both availability and affordability of insurance. This straightforward concept becomes complicated when actuarially sound rating factors intersect with other attributes in ways that can be perceived as unfairly discriminatory.
Algorithms and machine learning hold great promise for ensuring equitable pricing, but research has shown these tools also can amplify any biases in the underlying data. The insurance and actuarial professions have been researching and attempting to address these concerns for some time (see list below).
Want to know more about the risk crisis and how insurers are working to address it? Check out Triple-I’s upcoming Town Hall, “Attacking the Risk Crisis,” which will be held Nov. 30 in Washington, D.C.
The latest Insurance Information Institute (Triple-I) research indicates that between 2013 and 2022, economic and social inflation fueled a $96 to $105 billion increase in combined claim payouts for U.S. personal and commercial auto insurer liability.
The report “Impact of Increasing Inflation on Personal and Commercial Auto Liability Insurance” outlines Triple-I’s continued exploration of the impact of social inflation on insurer costs and claim payouts. The study proposes that increasing inflation drove loss and DCC (defense containment costs) higher in both insurance lines– by 6.5 percent ($61 billion) of total loss and DCC for personal auto and by 19 to 24 percent ($35 to $44 billion) for commercial auto.
Key Takeaways
Estimates place the average annual impact of increasing inflation at 0.6 percent for personal auto and 2.7 percent for commercial auto.
The accident rate (claim frequency) declined, and claim severity (size of losses) increased dramatically for personal and commercial lines.
Increasing inflation was mainly driven by social inflation factors before 2021, and since that year, it has continued as a product of economic and social inflation.
Researchers Jim Lynch, FCAS, MAAA, Triple-I’s former chief actuary, Dave Moore, FCAS, MAAA, president, Moore Actuarial Consulting, LLC, and Dale Porfilio, FCAS, MAAA, Triple-I’s chief insurance officer, approached the topic in a manner similar to their prior collaborations (in 2022 and early 2023). They used loss development patterns to identify inflation for selected property/casualty lines in excess of inflation in the overall economy. However, they extended their methodology in this project to use annual statement data through year-end 2022. Also, in this report, the authors use the term “inflation” for the first time to convey the operative mix of social and economic inflation on insurers’ costs.
Commercial Auto Liability
Data indicates that commercial auto liability faces its share of challenges, too, as losses have outpaced the growth rate of the overall economy. Claim severity (size of losses) has risen 72 percent overall since 2013, with the median annual increase at 6.3 percent. The report compares this change to the annual median increase of 2.1 percent in the Consumer Price Index, an observation offered as evidence that before 2020, social inflation may have been a primary factor in loss trends.
Researchers estimate 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. Researchers contend the loss development factors for this line of business signal an ongoing problem of inflationary factors.
Personal Auto Liability
This line took in four times the net earned premiums in 2022 as commercial auto liability. However, multimillion-dollar personal auto settlements are rare; consequently, the cases have less impact on insured losses or development patterns. Premiums and insurer losses in this line fluctuated over the prior two decades but continue to increase, albeit more slowly than the overall economy. In recent years, however, losses have been growing faster than premiums. Since 2020, premiums fell 13 percent, while losses rose 15 percent. And, after 2019, severity increased dramatically, with the compound annual increase holding 3.0 percent from 2013 to 2019, then tripling to 9.2 percent compounded annually.
The double whammy of economic inflation and social inflation
The report describes the nuanced findings of personal and commercial auto liability –understandably different as these markets differ in many aspects, including size and risk factors. The analysis reveals some trends in common, however. Findings in commercial and personal auto liability indicate that the overall accident rate (claim frequency) declined during the early pandemic years, yet the severity (size of losses) increased more dramatically.
The earliest study in this series looked at insurance trends through the end of 2019, focusing on loss development factors (LDFs). Since economic inflation was stable, but LDFs were increasing steadily during that time, the researchers concluded that economic inflation was likely not the cause of rising costs. Then, beginning in 2021, a sizable uptick in the CPI-All Urban signaled a rise in overall economic inflation.
The resulting implications for underlying insurer costs can be observed in factors that impact claim payouts, such as replacement costs. The report states that since 2008, replacement costs for commercial and personal auto insurance have outpaced overall prices in the economy by 40 percent. Since 2019, these costs have risen almost three times faster than prices overall. Thus, for the years prior, researchers continue to attribute the bulk of losses for both lines primarily to social inflation but propose that social inflation and increasing overall economic inflation share the credit beginning in 2020.
Triple-I plans to continue to foster a research-based conversation around social inflation. For an overview of the topic and other helpful resources about its potential impact on insurers, policyholders, and the economy, check out our knowledge hub, Social inflation: hard to measure, important to understand.
As part of its attack on the risk crisis, Triple-I recently participated in a project led by the National Institute of Building Sciences (NIBS) to develop a roadmap for mitigation investment incentives. The Resilience Incentivization Roadmap 2.0 builds off research NIBS published in 2019 and focuses on urban pluvial flooding, though many of the principles can be applied to riverine and coastal flooding, as well as non-flood perils.
“Pluvial urban flooding” refers to rainwater that can’t flow downhill fast enough to reach streams and stormwater systems and therefore backs up into buildings. Much of the inland flooding caused by Hurricane Ida (2021), Hurricane Ian (2022), and more recent flooding in California due to “atmospheric rivers” and in the Northeast would fall under this category. Common low-cost measures exist to protect buildings from such flooding, and the relative ease and affordability of such mitigations made pluvial urban flooding an appropriate initial target.
This project was a collaboration representing stakeholders in the built environment – lenders, developers, insurers, engineers, agencies, policymakers – with the goal of helping communities develop layered mitigation investment packages. Triple-I’s role was to represent the property/casualty insurance industry as a stakeholder and co-beneficiary of investment in advance mitigation and resilience.
Insurers have strong incentives to encourage policyholders to make improvements that reduce the risk of costly claims. In the case of flood risk – an increasingly expensive peril outside FEMA-designated flood zones – encouraging such improvements is preceded by a different challenge: persuading homeowners to obtain flood insurance.
About 90 percent of U.S. natural disasters involve flooding. Estimates of size of the “flood protection gap” vary widely among experts, but illustrations worth noting include:
Less than 25 percent of buildings inundated by Hurricanes Harvey, Sandy, and Irma had flood coverage;
Inland areas hardest hit by the remnants of Hurricane Ida in 2021 were in areas in which less than 2 percent of properties had federal flood insurance;
In 2022, historic flooding in and around Yellowstone National Park affected areas in which only 3 percent of residents have federal flood insurance; and
More recently, precipitation from atmospheric rivers affecting the U.S. West Coast has resulted in an unparalleled weather event not experienced in several decades, with much of the activity affecting areas with low flood-insurance purchase rates.
For decades, U.S. insurers considered flood risk “untouchable” because of how hard it is to quantify their risk. As a result, flood is excluded under standard homeowners and renters policies, but coverage is available from FEMA’s National Flood Insurance Program (NFIP) and a growing number of private insurers that have gained confidence in recent years in their ability to underwrite this risk using sophisticated risk modeling.
Consumer research has consistently shown that some of the most common reasons for not buying flood insurance include:
An erroneous belief that flood risk is covered under standard homeowners insurance;
If the mortgage lender doesn’t require flood insurance, it must not be necessary; and
The coverage is too expensive.
The roadmap provides findings and specific recommendations developed by its multidisciplinary team of authors in collaboration with broad and diverse participation of stakeholder group members. The NIBS Committee on Finance, Insurance, and Real Estate (CFIRE) will host a webinar on October 18 to go over these findings and recommendations. In addition, CFIRE chair Dan Kaniewski will be a participant in Triple-I’s November 30 Town Hall: Attacking the Risk Crisis in Washington, D.C.
