House Financial Services Subcommittee Issues Testimony From American Property & Casualty Insurance Association Senior VP Gordon (Part 1 of 2)
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Chairman Davidson, Ranking Member Cleaver, and members of the Subcommittee, the
OVERVIEW
Insurers' core business is protecting people and helping them recover from catastrophic losses to their homes, cars, and businesses. The property casualty insurance industry is solvent but facing rapidly escalating coverage demands at the same time that insured losses are skyrocketing, causing net underwriting losses that make it nearly impossible to attract the needed additional investment capital for the increasing exposures.
Particularly where states suppress or delay insurance rate increases, there is a growing gap between expected insured losses and premiums. Last year, insurers absorbed the worst underwriting losses in over a decade, contributing to a contraction of more than
The root causes of the growing losses are:
* Increased asset values in regions exposed to higher risk of natural catastrophes
* Economic inflation
* Increases in extreme weather (e.g., wildfires, hurricanes, and convective storms)
* Climate change
* Legal system abuse, and
* Regulatory coverage mandates, rate suppression, and rate approval delays.
The top driver of losses is the increase in exposure values and replacement costs, represented both by continued construction in high-hazard areas and by high levels of inflation that are driving up repair and rebuild costs. The number of people living in high wildfire risk areas doubled over the past two decades and the top hurricane-exposed states had double-digit percentage population growth between 2010-2020,5 trends that accelerated after the pandemic.
While insurance capital contracted last year, home values and building replacement costs spiked to record levels. Over the last five years, home values have increased 50 percent and building replacement values 44 percent6, far more than the average increase in homeowners insurance. In the first half of this year, homeowners and commercial property claims costs increased by 36 and 30 percent respectively, elevating the loss ratios (claims payments versus premiums) to the highest first-half level in over a decade.7 Used cars and trucks, which are the basis for auto insurance total loss settlements, increased nearly 40 percent over the last five years,8 also far more than the increase in auto insurance rates, with combined ratios (the ratio of combined claims payments and expenses compared to premiums) last year the highest since at least 1975.9
The frequency of severe weather events is increasing, even discounting for inflation. Average global natural catastrophe insured losses have nearly doubled over the last decade, a majority of which occurred in
1
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5 https://www.iii.org/press-release/triple-i-population-growth-drives-hurricane-loss-trends-071422.
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10 https://www.ncei.noaa.gov/access/billions/
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Legal system abuse is further exacerbating insurance affordability pressures.
The rapid escalation of losses and expenses well beyond insurance premiums collected caused a contraction in the industry's capital last year, while the lack of profitability is hindering ability to attract sufficient additional investment capital to meet increased coverage demands. Prudent risk management requires insurers to hold adequate capital to fund the volatility associated with insurance against rising auto accident and repair costs, natural catastrophes, and other potential losses. Insurers and reinsurers are only able to attract additional investment capital if they can offer investors an adequate rate of return. Unfortunately, insurers' ability to manage their risk in some states has been constrained by government underwriting mandates and delays in the review and approval of adequate rates, triggering severe market disruptions and reductions in coverage availability.
Insurance pricing also is a mechanism for conveying the consequences of decisions about road safety, where and how we build, and where people choose to live. Actuarially sound rates help with better recognition of climate-related impacts and increasing climate-risk exposures, encourage adoption of mitigation and resiliency strategies, and maintain insurance availability and private competitive markets. Where regulators suppress or delay adjustment in insurance rates, it masks socially beneficial climate-change risk signals, forcing policyholders and taxpayers residing in safer areas to subsidize those living in high-climate-risk regions.
To the extent insurers are able to charge actuarially justified rates, there is sufficient long-term capital and capacity available to insure against most natural catastrophes. But providing long-term affordable coverage for increasingly expensive buildings in areas at the highest risk of natural catastrophes will require significant improvements in mitigation and resiliency. Insurers and reinsurers have historically been leaders in understanding, quantifying, and mitigating weather risk, including increasing climate change risk and exposures. Earlier this year, APCIA helped develop a report by the
APCIA has identified dozens of state and federal programs that would help reduce catastrophe losses and generate significant long-term savings for consumers and governments, and we have been proactively supporting government programs to encourage improvements in building codes, improved land use planning to reduce the accumulation of assets in high-risk areas, retrofitting existing homes and infrastructure for greater resiliency, and improved land use management to reduce risk for wildfires.
Insurers are committed to finding solutions to provide catastrophic loss indemnification and risk management services to consumers. But insurance markets will only stabilize when the gap between rates and losses is addressed, and property casualty insurers are allowed to earn a rate of return sufficient to attract the additional investment capital needed to cover escalating consumer risk exposures.
11 https://www.swissre.com/institute/research/sigma-research/Economic-Insights/us-liability-claims.html#:~:text=US%20liability%20claims%20costs%20rose,not%20changed%20by%20COVID%2D19. ("Claims severity" refers to a proxy calculated as liability claims growth (claims incurred on a calendar-year basis) minus real GDP growth (as a proxy for exposure growth)).
12 Auto Insurance Report (
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14 Ibid. (between 1990 and 2000, the global average share of insured losses was approximately 22%, compared with 33% between 2010 and 2020; in
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INSURANCE MARKET FINANCIAL OVERVIEW
Solvency: The
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15 APCIA's Analysis of First Half Financial Operating Results and Trends Impacting 2023 (
16 Property and casualty insurance provides coverage for personal and commercial property and assets (e.g., house, car, etc.) and liability for accidents, injuries, and damage to other people or their belongings.
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18 APCIA Analysis of Financial Operating Results and Trends Impacting 2023 (Spring 2023).
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While overall policyholder surplus for the industry ticked up in the first half of 2023, it
continued to contract for half of the top 10 and 20 P&C underwriters, even before Hurricane
Idalia and the
of
risk exposures have continued to dramatically escalate.20
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Profitability: The profitability of the P&C insurance industry has been extremely low and has worsened recently, as shown in the accompanying graph comparing return on net worth against the rates for all industry, calculated by the
The deficient returns on insurance investments further worsened last year, with P&C insurers almost twothirds less profitable as measured by return on equity. As interest rates have climbed, providing alternative investment options, and the industry's profitability and return on investment have decreased, this has created financial headwinds for insurers and reinsurers seeking to attract enough new investment capital.
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19 AM Best
20 APCIA based on
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Mounting underwriting losses pushed P&C insurers' second quarter 2023 after-tax net income to the lowest level since 2011, with the industry eking out just
Personal Lines: Personal lines insurance has become particularly unprofitable in recent years. In 2022, the
Homeowners: Homeowners insurance input costs (e.g., cost of home goods and services) have increased faster than the underlying rate of consumer inflation. The
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22
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According to data from
they have collected in premiums. The combined ratio is projected to exceed 100 again in 2023 - meaning another net underwriting loss.
Automobile: Rapid increases in inflation over the last year have spiked auto insurance losses. Insurance claims inflation has been rising even faster than the underlying consumer price index, far outpacing increases in premiums. As the chart below illustrates, during the five-year period ending in
Though the overall rate of increase has slowed from its peak, the cost of things that auto insurance pays for has increased significantly over the last five years and continues to do so. The government's most recent inflation data show the rate of growth in auto body repair prices above the general rate of inflation for 27 consecutive months.
23 The
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Both auto claim frequency and costs per claim have risen precipitously over the last five years. According to quarterly survey data from ISS/ISO/NISS, average claim costs have risen to new highs for bodily injury (
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Record-breaking vehicle theft is an additional factor contributing to rising losses. Nearly 500,000 vehicles were reported stolen nationwide in the first half of 2023. From the first half of 2022 to the first half of 2023, states with the largest increase in vehicle thefts include
Commercial Lines
The commercial insurance market is experiencing similar challenges to those in personal lines due to inflation and other cost drivers. The combined ratio for the commercial multi-peril line has exceeded 100 for the last seven years in a row and is projected to exceed 100 again in 2023. From an underwriting standpoint, commercial auto is the least profitable of the major commercial business lines by a wide margin. Since 2012, commercial auto has been one of the worst-performing lines of business, with a higher combined ratio in each year than the aggregate commercial lines combined ratio.29
The global reinsurance markets are also highly solvent but facing profitability challenges. Global reinsurers have had to manage the cover they provide against catastrophic property insurance risks after several years of large catastrophe losses, particularly as prices have failed to keep pace with weather-related losses. However, according to Fitch Ratings, reinsurers are still offering ample cover for severe catastrophes, albeit at a higher cost to primary insurers.30
Global reinsurance capital in 2022 contracted by
26
27 APCIA developed a white paper entitled Electric Vehicle Adoption and Impacts for the Insurance Industry (
28 S&P
29 AM Best: "Pre-Pandemic Woes Return to Commercial Auto",
31 https://www.aon.com/getmedia/5bd28313-9c37-461c-b665-69a910bf0a6a/20230628-midyear-rmd.pdf 32 https://www.ajg.com/gallagherre/news-and-insights/2023/september/1h-2023-reinsurance-market-report/
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Reinsurance costs in the
Since 2017, the re/insurance industry has paid out
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INCREASING NATURAL CATASTROPHE LOSSES
Weather-related disasters are becoming increasingly common across the globe, causing significant economic damage and societal losses. Insurers also continue to be concerned with the increasing volume of so-called "secondary peril" events, which are generally smaller to mid-sized events or secondary effects that follow a primary peril. These include severe storms, wildfires, flooding, drought, and snow and ice storms. Such secondary peril events are generating increasing insured losses, affecting the bottom lines of personal and commercial lines property underwriters.
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In the
The annual number of billion-dollar weather and climate disasters in the
37 Gallagher Re, Q3 2023 Natural Catastrophe Report, https://www.ajg.com/gallagherre/news-and-insights/2023/october/natural-catastrophe-report-q3-2023/
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39
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COST DRIVERS
The primary factors driving increasing losses are demographic shifts leading to increased asset values in higher-climate-hazard areas, economic inflation, climate change, legal system abuse, claims fraud, government interference in the form of both new laws that expand policy coverage and overall exposure for insurers, and regulatory constraints that simultaneously limit the ability of insurers to manage growing exposure and costs.40 Each of these problems increases system costs, which in turn has led directly to higher premiums for policyholders.
According to Swiss Re:41
Rather than the physical destructive force of natural catastrophes themselves, the main drivers of resulting high losses are economic growth, accumulation of asset values in exposed areas,
urbanization and rising populations, often in regions susceptible to natural perils. We expect that these and the evolution of a range of present-day risk factors like climate change effects and, of late, inflation, will continue to drive losses higher.
40 APCIA, the
41
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According to a 2022 study on Global Modeled Catastrophe Losses by the data analytics firm
1. A rise in exposure values and replacement costs, represented both by continued construction in high-hazard areas and by high levels of inflation that are driving up repair and rebuild costs.
2. The natural variability that comes from selecting any five-year sample of natural catastrophe experience
3. The effects of climate change on different atmospheric perils
4. The impacts of man-made loss drivers, such as social inflation and legal and regulatory factors
Much of the increase in natural disaster costs can be attributed to rapid population growth in catastropheprone areas such as the wildland urban interface (WUI), where wildfire risk is high, and the
By some estimates, the number of Americans directly exposed to wildfire doubled over the past two decades43 and approximately one in six Americans currently live in areas with significant wildfire risk.44 The hurricane-exposed states of
PUTTING THE IMPACTS ON CONSUMERS INTO PERSPECTIVE
The following charts show the typical payments made by homeowners from 2018-2023 compared to overall inflation.48 Among homeowners' expenses for mortgage payments, costs of utilities, property taxes, and maintenance costs, homeowners insurance constitutes the lowest category in all years. While homeowners insurance has been getting more expensive, all other categories of homeowners' expenses have increased more rapidly.
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42 https://www.air-worldwide.com/siteassets/Publications/White-Papers/documents/2022_Global_Modeled_Catastrophe_Losses.pdf, p.4 (2022).
43 https://www.cbsnews.com/news/risk-of-wildfires-near-homes-doubled-why/.
44 https://www.washingtonpost.com/climate-environment/interactive/2022/wildfire-risk-map-us/.
45 https://www.iii.org/press-release/triple-i-population-growth-drives-hurricane-loss-trends-071422.
46 https://www.nytimes.com/2022/12/02/briefing/why-hurricanes-cost-more.html.
47 See GFIA report on "Global protection gaps and recommendations for bridging them",
48 Data drawn from multiple sources including the BLS, NAIC,
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CONSEQUENCES OF RATE SUPPRESSION - CONSUMER SHIFT TO SURPLUS LINES AND RESIDUAL MARKETS
A critical element of properly functioning insurance markets for consumers is maintaining the ability for insurers to charge an adequate rate for the risk covered. As insurers continue to face increasing pressure in catastrophe-prone states, and especially in the states with regulatory constraints that have made it more challenging for insurers to manage growing exposure and costs, there are a variety of risk mitigation steps insurers may choose to take based on their business models, capital needs, and risk appetite, among other factors. Additionally, the non-admitted market and residual market plans are increasingly serving as a relief valve.
Some insurers choose to do business on a surplus lines (or "non-admitted") basis, which means they are generally not subject to rate or policy regulation by the state insurance regulator. Instead,
Intelligence, the
billion in the first six months of 2022. This represents an E&S premium growth of 27.6 percent versus the same prioryear period, a substantially larger rate of growth than the total
Residual market plans have similarly experienced significant growth. However, the expansion of policies in residual market plans weighs heavily on admitted insurance companies, as the concentration of high-risk properties could result in substantial losses in any given year. Should losses exceed a residual market plan's claims paying capacity, assessments might be
made against admitted market insurers, forcing those insurers (and ultimately their policyholders) to pay the shortfall.
A growing number of residual market plans are now experiencing increasing financial stress. For example, a Louisiana Legislative Auditor report noted that Louisiana Citizens, the state's residual market plan, may not have adequate reinsurance to pay claims if a major hurricane occurs, due to the higher number of policies and problems in the reinsurance market.50 Florida Citizens,
49
50 https://app.lla.state.la.us/publicreports.nsf/0/9d5c25a709f476a3862588da005c6930/$file/000283c0.pdf.
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...record
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(Continues with Part 1 of 2)
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URL:
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View original text, plus charts here https://docs.house.gov/meetings/BA/BA04/20231102/116528/HHRG-118-BA04-Wstate-GordonR-20231102.pdf
House Financial Services Subcommittee Issues Testimony From American Property & Casualty Insurance Association Senior VP Gordon (Part 2 of 2)
House Financial Services Subcommittee Issues Testimony From Reinsurance Association of America President Nutter
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