House Financial Services Subcommittee Issues Testimony From American Property & Casualty Insurance Association Senior VP Gordon (Part 1 of 2)

WASHINGTON, Nov. 13 -- The House Financial Services Subcommittee on Housing and Insurance issued the following testimony by Robert Gordon, senior vice president for policy, research and international of the American Property and Casualty Insurance Association, involving a hearing on Nov. 2, 2023, entitled "The Factors Influencing the High Cost of Insurance for Consumers":

* * *

Chairman Davidson, Ranking Member Cleaver, and members of the Subcommittee, the American Property Casualty Insurance Association (APCIA) appreciates the opportunity to testify on the "Factors Influencing the High Cost of Insurance for Consumers." APCIA is the primary trade association for home, auto, and business insurers. For 150 years, we have promoted private competition for the benefit of consumers and insurers. APCIA members represent all sizes, structures, and regions - protecting families, communities, and businesses in the U.S. and across the globe.

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 $73 billion in insurers' capital. In the first half of 2023, insurers spent 104.3 cents in claims and expenses for 100 cents of premium collected -- and that's before the Maui wildfire and Hurricane Idalia catastrophes this fall. Overall, for 2023, S&P predicts that auto insurers will have an 8.7 percent net underwriting loss1 and homeowners insurers a 12.1 percent loss -- the worst in over a decade.2 Ratings agency AM Best last month downgraded the entire homeowners insurance industry from stable to negative,3 with the total number of downgrades of homeowners and car insurers more than doubling in the first half of this year.4

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 the United States. In just the first nine months of this year, there have already been 24 weather events causing over a billion dollars in losses -- a new record. According to the National Oceanic and Atmospheric Administration (NOAA), the annual average of such events was 8.1 in 1980-2022, increasing to 18 from 2018-2022 (adjusted for CPI).10

1 S&P Global Market Intelligence, U.S. Auto Insurance Market Report (October 2023).

2 S&P Global Market Intelligence, U.S. P&C Insurance Market Report (October 2023).

3 AM Best, Market Segment Report: Market Segment Outlook - US Homeowners (September 2023).

4 AM Best, Special Report: US Property/Casualty Downgrades Outnumber Upgrades in First-Half 2023 (October 2023).

5 https://www.iii.org/press-release/triple-i-population-growth-drives-hurricane-loss-trends-071422.

6 Bureau of Economic Analysis.

7 https://www.swissre.com/institute/research/sigma-research/Insurance-Monitoring/us-property-casualty-outlook-september-2023.html.

8 Bureau of Labor Statistics.

9 Swiss Re Institute, Ibid.

10 https://www.ncei.noaa.gov/access/billions/

* * *

Legal system abuse is further exacerbating insurance affordability pressures. U.S. liability claims costs rose 16 percent on average for the last five years, far exceeding economic claims drivers.11 Regulatory mandates and massive data calls, such as the climate reporting requirements currently contemplated by the Securities and Exchange Commission, Federal Insurance Office, and the NAIC, add further significant cost pressures. Many states require prior approval of insurance rate increases. According to a reported study by Milliman, the average time for auto insurance rate approvals this year was 267 days in California, 108 days in Texas, and 79 days in Florida. Long delays in regulatory rate approvals, combined with the additional time to prepare filings that meet regulatory requirements and the time it takes to implement approved rates into six- or twelvemonth policies can create a significant gap between escalating losses and fully realized rate increases.

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 Global Federation of Insurance Associations13 (GFIA) entitled: "Global protection gaps and recommendations for bridging them." Natural catastrophes were recognized as creating one of the four most significant protection gaps. The GFIA report notes that the average share of insured natural catastrophe losses has increased over time globally; however, this has not resulted in a decrease in the natural catastrophe protection gap in absolute numbers, which stands at roughly US$139 billion per annum.14 The report emphasized the critical role of (re)insurance and the urgent need for government and the private sector to work together to address the rising global natural catastrophe losses.

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 (October 23, 2023), referencing a study by Sheri Scott from Milliman.

13 Global Federation of Insurance Associations represents insurance associations that account for around 89% of total insurance premiums worldwide, amounting to more than $4 trillion.

14 Ibid. (between 1990 and 2000, the global average share of insured losses was approximately 22%, compared with 33% between 2010 and 2020; in Europe and North America, roughly 60-70% of catastrophic losses are insured).

* * *

INSURANCE MARKET FINANCIAL OVERVIEW

Solvency: The U.S. property and casualty16 (P&C) insurance surplus is currently slightly over a trillion dollars.17 Insurers require additional surplus to meet the ever-increasing risks and exposures, ranging from cyber threats in just about all insurance products to the devastating impact of extreme weather events and climate change. However, the aggregate net worth of the U.S. P&C insurance industry - the financial cushion to absorb unexpectedly high claims costs, investment losses, and catastrophe and weather events - fell by $73.1 billion in 2022.18 The 6.9 percent drop from year-end 2021 was the largest percentage decline since the "Great Recession" year of 2008. The deterioration in industry financial strength was driven by underwriting losses (defined as claims paid and incurred versus premium revenue) of $25.6 billion (the largest loss since 2011) and record unrealized investment losses of $97.2 billion. Relative to the aggregate value of goods and services produced in the economy, insurance industry capital and surplus has shrunk. In the last three quarters, growth in capital and surplus failed to keep pace with growth in GDP - and the gap appears to be widening. This mismatch between insurance capital supply and consumer coverage demand is triggering market friction and availability concerns.

* * *

[View chart in the link at bottom.]

* * *

15 APCIA's Analysis of First Half Financial Operating Results and Trends Impacting 2023 (October 2023) is available at https://www.apci.org/attachment/static/9006/.

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.

17 S&P Global Market Intelligence based on NAIC June 2023 data for property casualty insurers ($1.039 trillion).

18 APCIA Analysis of Financial Operating Results and Trends Impacting 2023 (Spring 2023).

* * *

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 Maui wildfires.19 Despite the surplus growth, the June 30 aggregate value

of $1.04 trillion remains below the high-water mark of $1.05 trillion set at the end of 2021, while

risk exposures have continued to dramatically escalate.20

* * *

[View chart in the link at bottom.]

* * *

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 National Association of Insurance Commissioners (NAIC).

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.

* * *

[View chart in the link at bottom.]

* * *

19 AM Best Co "Best's Rankings", September 1, 2023.]

20 APCIA based on S&P Global Market Intelligence data

* * *

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 $0.4 billion in earnings. Net income for the first half was $8.9 billion, representing a pre-tax return on revenue of just 2.3 percent and a very low after-tax return on statutory surplus of 1.8 percent (annualized).

Personal Lines: Personal lines insurance has become particularly unprofitable in recent years. In 2022, the U.S. inflation rate accelerated to a 41-year high of eight percent, reaching a peak in June of 9.1 percent. In the first half of 2023, direct losses on home and farm insurance rose 24.5 percent over the first half of 2022, while personal auto losses rose 12.3 percent, with property losses up 10.7 percent and liability losses up 13.4 percent.

Homeowners: Homeowners insurance input costs (e.g., cost of home goods and services) have increased faster than the underlying rate of consumer inflation. The U.S. net stock of private structures (residential and non-residential) "replacement value" estimated by the U.S. Bureau of Economic Analysis (BEA) data rose more than 450 percent between 1990 and 2022.21 This upward trend accelerated with the pandemic. In the five years from 2018 to 2022E (Swiss Re estimate22) alone, the replacement value increased 44 percent (from 2018 $37.2T to 2022E $53.5T). Principal drivers of cost inflation for home insurers have far outpaced the growth in home insurance prices over the past five years.

21 U.S. Bureau of Economic Analysis, Current-Cost Net Stock of Private Fixed Assets, Equipment, Structures, and Intellectual Property Products by Type, 1990 - 2021, available at: https://apps.bea.gov/iTable/?ReqID=10&step=2#eyJhcHBpZCI6MTAsInN0ZXBzIjpbMiwzLDNdLCJkYXRhIjpbWyJUYWJsZV9MaXN0IiwiMTgiXSxbIlNjYWxlIiwiLTkiXSxbIkZpcnN0X1llYXIiLCIyMDExIl0sWyJMYXN0X1llY

22 Swiss Re Institute, "Natural catastrophes and inflation in 2022: a perfect storm", p.23 (2023).

* * *

[View chart in the link at bottom.]

* * *

According to data from S&P Global Market Intelligence, the U.S. combined ratio (defined as claims paid and incurred plus administrative expenses) for the homeowners line has exceeded 100 for five out of the last six years, meaning insurers have spent more in claims payments and expenses than

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 September 2023, private passenger auto insurance premiums have increased by 14.6 percent and commercial auto insurance premiums by 5.5 percent.23

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 U.S. Bureau of Labor Statistics (BLS) generates both a Consumer Price Index (CPI) and a Producer Price Index (PPI) for personal auto insurance premiums and homeowners insurance premiums, as well as a Producer Price Index for several other commercial lines of insurance. CPI and PPI are calculated using different methods and are used for different purposes. According to the BLS web site's "Frequently Asked Questions: How does the Producer Price Index differ from the Consumer Price Index?", the PPI reflects the revenue received by its producer whereas the CPI reflects the out-of-pocket expenditure by a consumer. APCIA support a reference to the PPI as a more relevant measure of underlying insurance price changes because they allow direct comparability between personal and commercial insurance lines, and PPI calculations have fewer "moving parts" than the CPI which displays greater volatility caused by factors other than the pure cost of underwriting insurance risk. For example, because the CPI focuses on "out of pocket expenses", it includes agency commissions, taxes and fees, none of which relate to the pure cost of the risk of loss. The CPI also reduces the premium by the amount of any policyholder dividends paid by the insurer to the policyholder. In 2020, U.S. property casualty insurers returned a record $7.7 billion to policyholders in the form of dividends, much of which as compensation for reduced exposure to accidents accompanying significantly reduced driving miles during the COVID shutdowns. Phasing out those dividends in 2021 ($4.6 billion) and 2022 ($3.3 billion) caused upward pressure on the CPI for auto insurance premiums that would not be reflected in the comparable PPI measure. Another important difference between CPI and PPI measures is that the CPI includes data for "urban consumers" only whereas the PPI surveys a U.S. insurer's entire book of business without geographic restrictions.

* * *

[View chart in the link at bottom.]

* * *

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 ($24,234), property damage ($5,945), collision ($5,731), and comprehensive ($2,274) coverages.24 Average comprehensive claims size has risen 15.1 percent from the first quarter of 2022 to the first quarter of 2023 (latest period available), while average claims rose 11 percent and 18.2 percent for collision and property damage, respectively. The main driver of double-digit percentage annual increases in average claim size is persistently high inflation for the goods and services that insurers pay for following auto accidents. Due to repair shop backlogs and supply chain issues, the average auto insurance repair cycle reached 23.1 days in 2023, 6.2 days longer than 2022 and nearly double the pre-pandemic average of 12 days.25 Despite taking longer, customer satisfaction with the auto insurance claims process improved in 2023.

24 Independent Statistical Service, Inc., Insurance Service Office, Inc., and National Independent Statistical Service's Fast Track Report. Data through the first quarter of 2023.

25 J.D. Power 2023 U.S. Auto Claims Satisfaction Study at https://www.jdpower.com/business/press releases/2023-us-auto-claims-satisfaction-study.

* * *

[View chart in the link at bottom.]

* * *

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 Illinois (38 percent), New York (20 percent) and Ohio (15 percent).26 Also, heavier electric vehicles and batteries are extremely costly to replace when damaged (and susceptible to combustion), and advanced technology on newer cars that is embedded in parts (e.g., bumpers and taillights) has made replacement of parts more expensive. The advanced vehicle technologies and components in EVs and newer vehicles also have fewer aftermarket parts manufacturers and may require specialized repair shops or technicians, which adds cost.27 Legal system abuse is also contributing to escalating auto insurance loss costs. S&P blames this in part on a rise in litigated auto claims resulting from increases in severe crashes as more accidents have been occurring at higher rates of speed.28

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

Reinsurance/Alternative Capital Markets

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 $87 billion - 12 percent of the total. By the first quarter of 2023, global reinsurer capital increased by 5 percent ($30 billion) to $605 billion.31 By the end of the first half of this year, reinsurance capital grew 13 percent to $709 billion (close to the $725 billion peak in 2021). Nonlife alternative capital (defined as financial products offered outside the traditional insurance sector and often financing natural catastrophe risk) increased by 4 percent in the first half to $99 billion, driven by an increase in catastrophe bonds.32

26 National Insurance Crime Bureau: "Vehicle Thefts Continue to Increase to Near-Record Highs in 2023", October 11, 2023.

27 APCIA developed a white paper entitled Electric Vehicle Adoption and Impacts for the Insurance Industry (September 2023) at https://www.apci.org/attachment/static/8785/.

28 S&P U.S. Auto Insurance Market Report (September 2023).

29 AM Best: "Pre-Pandemic Woes Return to Commercial Auto", October 3, 2023.

30 https://www.fitchratings.com/research/insurance/global-reinsurers-pull-back-from-natural-catastrophe-cover-24-08-2023.

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/

* * *

[View chart in the link at bottom.]

* * *

Reinsurance costs in the U.S. have surged as a result of the poor returns on capital driven by elevated insured natural catastrophe losses and other factors. Since 2017, the cumulative rate index for reinsurance has risen 97 percent (after a long soft market). According to Swiss Re:33 With more risk and more exposure to leveraged capital from outside of their own balance sheets, reinsurers retained earnings have been insufficient to bear their cost of capital, let alone build stronger balance sheets to cater for an increasing risk landscape.

Since 2017, the re/insurance industry has paid out USD 650 billion (in 2022 prices) for weather-related natural catastrophes claims. However, premium income has not kept pace with events or exposure growth - whether measured by GDP or other more targeted measures - the result being steadily declining profits... Perceptions about whether risks are priced adequately is key in determining the supply of capital and capacity available for underwriting. The historically elevated catastrophe and claims activity since 2017 has created doubts on the part of re/insurers and investors, which slowed the capital supply response.

* * *

[View chart in the link at bottom.]

* * *

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.

* * *

[View chart in the link at bottom.]

* * *

Aon, one of the largest global insurance brokers, reported that global natural catastrophes reached $313 billion in economic losses in 2022, while global insured losses reached $132 billion, well above short- and long-term averages.34 Global economic and insured losses from natural disasters in the first half of 2023 are estimated to be $194 billion and $53 billion, respectively,35 well above their 20-year averages.36 2023 is projected to become the sixth year since 2017 to exceed $100 billion in global insured losses.37

In the U.S., economic losses from natural catastrophes reached $165 billion in 2022, 65 percent above the average since 2000 (adjusted to 2022 dollars), while insured losses reached $99 billion.38 The combined insured losses of 2020 through 2022 in the U.S. reached $287 billion (adjusted to 2022 dollars) for natural catastrophes, making this the costliest consecutive three-year period on record for U.S. insurers. So far in 2023, U.S. insured losses are continuing their above-average trend.

The annual number of billion-dollar weather and climate disasters in the U.S. has also been increasing. The average number from 1980 to 2021 was 7.7 per year, while the average was 17.8 events per year from 2017 to 2021.39 In 2022, there were 18 weather or climate disaster events with losses exceeding $1 billion each. In the first nine months of 2023, the U.S. saw 24 separate billion-dollar events, breaking the previous annual record of 22 in 2020, with three months still left in the year.

35 https://assets.aon.com/-/media/files/aon/capabilities/reinsurance/global-catastrophe-recap-1h-2023.pdf.

36 https://www.fitchratings.com/research/insurance/global-reinsurers-pull-back-from-natural-catastrophe-cover-24-08-2023.

37 Gallagher Re, Q3 2023 Natural Catastrophe Report, https://www.ajg.com/gallagherre/news-and-insights/2023/october/natural-catastrophe-report-q3-2023/

38 Aon 2023 Weather, Climate and Catastrophe Insight, https://www.aon.com/weather-climate-catastrophe/index.aspx.

39 NOAA National Centers for Environmental Information (NCEI), U.S. Billion-Dollar Weather and Climate Disasters (2022). https://www.ncei.noaa.gov/access/billions/.

* * *

[View chart in the link at bottom.]

* * *

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 Association of Bermuda Insurers and Reinsurers (ABIR), and the Reinsurance Association of America (RAA) developed a white paper entitled It's Not Just the Weather: The Man-Made Crises Roiling Property Insurance Markets (August 2022) at https://www.apci.org/attachment/static/6783/.

41 Swiss Re Institute, "Natural catastrophes and inflation in 2022: a perfect storm", p.2 (2023).

* * *

According to a 2022 study on Global Modeled Catastrophe Losses by the data analytics firm Verisk, the factors most impacting losses in order of importance are:42

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 Atlantic and Gulf of Mexico regions, which face the greatest risk from hurricanes. High value houses tend to be built in these areas susceptible to weather and climate-related events, further driving up the accumulation of assets in disasterprone areas.

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 Florida, South Carolina, Georgia, and Delaware all experienced double-digit percentage population growth between 2010 - 2020.45 The Houston area added more than 1.3 million homes between 1980 and 2020, where Hurricane Harvey caused an estimated $149 billion in damages in 2017.46 Ongoing development in coastal areas has also damaged natural areas such as wetlands that act as buffers by absorbing the physical effects of wind, waves, and storm surge.47

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.

* * *

[View chart in the link at bottom.]

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", March 2023 ("A driver contributing to the acceleration of the protection gap is the movement of populations and their valuable assets to high-risk areas.")

48 Data drawn from multiple sources including the BLS, NAIC, Insurance Information Institute, Forbes, NY Times, Business Insider, and Home Buying Institute. Data is intended to show directional and proportional differences, but the varying sources makes the data somewhat less precise.

* * *

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, U.S. domiciled surplus lines insurers are subject to regulatory requirements and are overseen by their domiciliary state; they then operate on a non-admitted basis in the other states in which the insurer offers policies. As a result, surplus lines carriers experience freedom of rate and form, which enables a surplus lines carrier to be innovative, creative, and responsive in developing a product that provides the level of coverage a consumer is seeking, while pricing the product in a financially responsible manner commensurate with the risk.

A.M. Best's Surplus Lines Market Report of 2022 noted there have been no surplus lines carrier financial impairments since 2004, suggesting surplus lines carriers continue to operate as a beneficial "safety valve for the admitted market". According to an analysis by S&P Global Market

Intelligence, the U.S. excess and surplus (E&S) market constituted 8.7 percent of the country's total property casualty industry during the first half of 2022, as direct written premiums surged to $37.6

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 U.S. P&C market (excluding E&S premiums), which grew by only 8.4 percent in the same period.49

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, Florida's property residual market, has grown from 486,773 policies in July 2020 to 1.3 million at the end of June 2023, with an insured value approaching a...

49 S&P Global Market Intelligence (Nov 30, 2022), "E&S premiums accounting for larger share of US property and casualty market".

50 https://app.lla.state.la.us/publicreports.nsf/0/9d5c25a709f476a3862588da005c6930/$file/000283c0.pdf.

* * *

[View chart in the link at bottom.]

* * *

...record $562 billion.51 California's property residual market, the FAIR plan, is smaller but similarly growing at a very rapid pace (see chart to the left). Similar challenges are emerging in residual market plans in other catastrophe-exposed states.52

* * *

(Continues with Part 1 of 2)

* * *

URL: American Property and Casualty Insurance Association

* * *

View original text, plus charts here https://docs.house.gov/meetings/BA/BA04/20231102/116528/HHRG-118-BA04-Wstate-GordonR-20231102.pdf