House Financial Services Subcommittee Issues Testimony From American Property & Casualty Insurance Association Senior VP Gordon (Part 2 of 2)
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(Continued from Part 1 of 2)
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SOLUTIONS TO MARKET DISRUPTIONS
The insurance market disruptions seen in some states can be alleviated by regulators allowing rates to adequately and accurately reflect risk in a timely manner. Beyond helping assure a stable insurance market, accurate risk-based pricing is reflective of comparative exposure to risk. Accurate insurance pricing of risks helps society recognize and address the true costs.
Longer-term solutions are also essential to effectively address the underlying cost drivers for losses. The deteriorating loss situation is felt most directly by impacted communities and households, but its financial impacts are also borne by insurers and government. And we all share the urgent need to reduce those losses by working together to mitigate risk and increase resiliency, address legal system abuse through meaningful tort reform, and resolve regulatory constraints that contribute to insurance market dysfunction.
To help make communities more resilient, insurers advocate for stronger and better enforced building codes, improved land use planning to reduce the accumulation of assets in high-risk areas, retrofitting existing homes and infrastructure, and improved land use management to reduce risk for wildfires.53 Our website provides extensive information on catastrophes for insurers and the public and includes specific resources for consumers on what they can do to protect their home from various types of natural disasters, available at www.apci.org/catastrophe.
Building Codes and Land Use Planning While individual owners can take important steps to mitigate risk at their property, widespread adoption of community-level mitigation measures, including stronger building codes and better land use planning, is needed to reduce the increasing risks from natural disasters.
There is tremendous opportunity to better support risk reduction and climate resilience in both new and existing buildings.
52 https://www.eenews.net/articles/growing-storms-push-shrinking-la-insurers-into-failure/.
53 See also, the GFIA report on "Global protection gaps and recommendations for bridging them",
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The insurance industry-funded
Wildfire Resiliency and Mitigation
In 2022, IBHS launched Wildfire Prepared Home(TM), a voluntary certification program designed to reduce wildfire risk. Like IBHS' FORTIFIED program, Wildfire Prepared Home helps homeowners protect their homes through evidence-based home hardening and defensible space techniques. These actions can help reduce vulnerabilities to heat, flames, and embers that often lead to a total loss when a home ignites. Launched initially in
Supporting Resilient Communities and Infrastructure
In addition to helping to mitigate the risks of wildfire, the Federal Government plays a key role in supporting community resilience.
In addition to these and similar programs,
Insurers support a comprehensive risk mitigation strategy that incorporates many different approaches. Insurers have also supported dozens of federal bills introduced in
54 https://www.usda.gov/sites/default/files/documents/wfmmc-final-report-09-2023.pdf.
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Financial Literacy and Empowerment
Insurance plays an essential role in protecting consumers and communities from catastrophic loss as well as sending societally beneficial market-based risk signals. Accurate risk-price signals promote economically viable decisions across the economy, especially when building in areas prone to catastrophic weather. Unfortunately, insurance products are sometimes misunderstood by consumers, potentially leaving them vulnerable to a major loss. Insurance companies continue to work hard to educate consumers about the importance of maintaining proper insurance and ways to mitigate risk. This includes providing dedicated insurance professionals to help explain insurance products and coverages, science-informed mitigation strategies, and the claims process. It also involves forging partnerships with government agencies, regulators, and other stakeholders. Organizations such as the
Insurers' Innovation
Insurers have long adapted to changing market conditions by developing innovative risk transfer mechanisms. Insurers strongly support technology-enabled forecasting, including the use of artificial intelligence (AI) and machine learning (ML), data collection, analysis, and hazard warning and notification systems. To respond to increasing natural disaster losses, insurers must be allowed to use forward-looking models to project evolving risks in a changing climate. Catastrophe (cat) models are updated using data from recent events and are fairly accurate in predicting risks over the period most property contracts are written (12 months). In some states, insurers are prohibited from using cat models to set rates, and are required by law to use historical averages, which masks recent loss trends.
Newer product offerings such as parametric (or index-based) insurance provide risk transfer beyond traditional insurance. Parametric insurance provides coverage against a predefined event happening that meets certain parameters or an objective index value, regardless of the actual loss sustained. While technology is affording new opportunities for parametric-style insurance products at the consumer level, parametric contracts are meant to supplement rather than replace traditional insurance coverage or to provide limited risk protection in instances where traditional insurance is unavailable. Insurers also offer products that support the energy transition, including policies for renewable energy projects and technologies, sustainable buildings and infrastructure, and fuel-efficient cars and electric vehicles.55
55 APCIA developed a white paper entitled Energy Resource and Insurer Roles During the Energy Transition (
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REGULATORY CONCERNS
Insurance in the
Federal Insurance Office (FIO)
In late 2022, the Federal Insurance Office (FIO) solicited feedback on a proposed data call that would collect insurers' historical underwriting data on homeowners insurance. FIO intends to use the data in its efforts to assess climate-related financial risk and the potential impacts of climate on insurance availability and affordability. APCIA expressed concerns with FIO's approach of imposing a potentially duplicative and costly data call on insurers directly. FIO is expected to conduct its data call in late 2023 or early 2024. Prior to releasing a data call, FIO is required to consult with state regulators to see if they already have the needed data and if it can be collected within a reasonable timeframe.
In
Last year, through the NAIC, a group of 15 participating states revised the annual climate risk disclosure survey to require more detailed disclosures consistent with the international framework of the
The NAIC's action is considered to be a response to FIO's proposed data collection, and the scope of NAIC's data call, expected to be finalized in late November, will likely inform FIO's data collection effort. APCIA is working with both parties to try and prevent dueling data calls from the NAIC and FIO, as well as urging the NAIC to collect data in the most efficient way possible and focus on data that can be gathered by statistical agents and data aggregators. APCIA has continuously raised with the regulatory community a longstanding concern about the plethora of data calls and lack of coordination on data calls among various bodies.
SPECIFIC STATE ISSUES
Over the last decade (2012-2021), NAIC data shows that the claims costs and expenses for total property casualty insurance in
The same NAIC report shows that homeowners insurance claims costs and expenses in
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[View table in the link at bottom.]
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The following graph was part of the September legislative briefing by the
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[View chart in the link at bottom.]
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56 Report on Profitability by Line by State in 2021,
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While
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[View chart in the link at bottom.]
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Long-term underwriting losses in
Following the pandemic, during a time of record inflation, insurers experienced a period of more than 30 months with no private passenger auto rate increase approvals by the CDI. The 2022 California personal auto loss ratio was the highest over the last decade at about 80 percent. That is prior to all expenses, ranging from commissions and overhead expenses to claims adjustment expenses (which combined were approximately 35 percent for 2021 according to the 2023 NAIC Profitability Report). While the CDI resumed auto rate approvals in late 2022, rate and filing reviews continue to show delay. "Requested rates" are often negotiated with the CDI, but approvals often come long after initial filings and typically well below the indicated rate need.
All this is taking place when the impact of climate change continues to hammer the state's consumers and businesses. After years of severe drought, the probability of significant floods is increasing from the unusually heavy rain in early 2023 and the likelihood of melting snowpacks to follow. This in turn may exacerbate the risks of catastrophic fires as flood debris and newly fertilized weeds dry out in the summer heat. CDI strongly encouraged and reached an agreement with the FAIR plan to increase its commercial insured limits. However, the FAIR plan already has a large deficit, and the additional exposure increases the chance of significant assessments on private insurers. Any shortfall generated by the FAIR plan will ultimately be paid for by all consumers and businesses in the state.
57 See supra n.6.
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That same day, Commissioner Lara announced his intention to "address problems fueled by climate change" and inflation, which over the years had brought
The actions [of the Commissioner's office] announced today are aimed at addressing problems fueled by climate change and being experienced by states across the nation including global inflation and increased costs for rebuilding that have led to several insurance companies pausing coverage for writing new homeowners and commercial insurance policies, non-renewing existing consumers, and increasing rates to maintain their financial stability. Unlike public utilities, which are required by law to cover all consumers, insurance companies will not write insurance, especially in high-risk areas, unless they are able to ensure they have the capital and reserves to fully meet all insurance claims submitted by consumers, cover their expenses, and earn a fair return.62
The remainder of Commissioner Lara's press statement outlines the related regulatory steps he is undertaking to stabilize the property casualty insurance market so that coverage is widely available and affordable. Importantly, he concludes with the following: "The current system is not working for all Californians, and we must change course. I will continue to partner with all those who want to work toward real solutions."63 APCIA is committed to working with the CDI and Commissioner Lara on those solutions.
Even prior to the second largest insured hurricane loss caused by hurricane Ian, the
58 See Governor Newsom Signs Executive Order to Strengthen Property Insurance Market,
59 Exec. Order N-13-23 (
60 See n. 44.
61 See Press Release, Commissioner Lara announces Sustainable Insurance Strategy to improve state's market conditions for consumers, Cal.
62 Ibid.
63 Ibid.
65 https://figafacts.com/assessments/.
66 AM Best: "Short-term pain to precede long-term gain for
67 AM Best: Florida Losses from Hurricane Idalia Are Unlikely To Match Hurricane Ian's,
68 Ibid.
69 Ibid.
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[View chart in the link at bottom.]
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The
These lawsuits have led to bankruptcies and reduced the state's tax revenue from energy production. Staged accidents involving big rigs in
The incoming Louisiana Insurance Commissioner
70 The
72 Ibid.
73 Ibid.
74 Louisiana Illuminator: "How incoming Insurance Commissioner
75 Ibid.
76 Ibid.
77 Ibid.
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OTHER OPPORTUNITIES AND CHALLENGES
Legal system abuse is a significant factor increasing rates in many lines of insurance. Over the five-year period of 2014-2018, the annualized increase in insured losses of commercial auto, product liability, and other commercial liability lines were 10.9, 17.4, and 9.3 percent, respectively.78 These values vastly outpaced an
annualized increase in CPI of 1.5 percent and an increase in GDP of 4.1 percent.
There are many drivers of legal system abuse. For example, lawsuits have become increasingly likely to result in "nuclear" verdicts (verdicts over
Nonetheless, the impact of legal system abuse is not limited to nuclear verdicts. Even average verdicts are seeing outsized growth, with a significant increase in ten years. In 2010, average personal injury verdicts were
The many drivers of these adverse changes and legal system abuse include: third party litigation financing (TPLF), a deeply opaque and burgeoning
TPLF is a particularly challenging aspect of legal system abuse, as it involves unknown, dark money investments and can be found in consumer, medical financing, as well as business to business (B2B) litigation. Financers are unabashed about what they do.
We are also seeing the challenging growth of foreign investment in civil litigation in the
78
79
80 Forbes, Today's Liability Crisis and Your Risk Management Options (
81
82
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CONCLUSION
The property casualty industry is solvent but facing rapidly escalating loss costs, particularly in the property and auto insurance lines. Losses are being driven by the increasing accumulation of asset values in regions vulnerable to higher risk of natural catastrophes, economic inflation, climate change, legal system abuse, and regulatory delays in approving rate filings, and coverage mandates. Particularly in states where challenges persist with rate filing approvals, rates have lagged far behind losses, resulting in record loss ratios and causing severe net underwriting losses.
The consequence of the rapid escalation of losses beyond insurance premiums collected caused a contraction in the industry's capital last year, while the lack of profitability has made it extremely difficult for insurers to attract sufficient additional investment capital to meet increased coverage demands. Many insurers have had to pull back from coverage exposures, resulting in availability challenges for consumers. Some states have reacted by expanding significantly underpriced residual markets or trying to mandate subsidized coverages. Those actions can create a further death spiral in the markets while creating subsidies that mask socially beneficial driving-risk and environmentally friendly climate-risk signals.
Insurance availability can be best improved by allowing competitive private markets to actuarially price risk according to expected costs, while reducing government rate suppression and policy form constraints. Insurance affordability is best addressed through improved mitigation and resiliency programs. APCIA has identified dozens of such state and federal programs that would help consumers and make their insurance more affordable.
Insurers' core business is protecting people and helping them recover from catastrophic losses to their homes, cars, and businesses. Insurers remain committed to our policyholders and American consumers. But insurance markets are facing very strong challenges that will require strong leadership to overcome. APCIA is ready and willing to work with state and federal regulators and policymakers on reforms.
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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
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House Financial Services Subcommittee Issues Testimony From American Property & Casualty Insurance Association Senior VP Gordon (Part 1 of 2)
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