Treasury Federal Insurance Office Issues Annual Report

WASHINGTON, Oct. 9 (TNSRep) -- The U.S. Department of the Treasury Federal Insurance Office issued a 126-page annual report:

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TABLE OF CONTENTS

EXECUTIVE SUMMARY...VIII

I. INTRODUCTION...1

* Federal Insurance Office Authorities and Insurance Regulation...1

* The Structure of this Report...3

II. INSURANCE INDUSTRY FINANCIAL OVERVIEW AND OUTLOOK...4

* Domestic Insurance Marketplace Overview and Outlook...4

* Financial Performance and Condition Overview...5

* Life and Health Sector...9

* Box 1: Registered Indexed-Linked Annuities: Addressing Longevity Risk Through Annuities...26

* Property and Casualty Sector...27

* Market Performance...42

* Domestic Outlook...44

* Capital Markets Activity...46

* Mergers & Acquisitions of U.S. Insurers...46

* Box 2: Life Sector Restructuring...47

* Changing Investment Strategies...48

* Alternative Risk Transfer Insurance Products...49

* Private Equity-Backed Insurers...50

* InsurTech Investments...52

* International Insurance Marketplace Overview and Outlook...53

III. TOPICAL UPDATES AND FIO ACTIVITIES...56

* Pandemic-Related Updates...56

* Domestic...57

* International...63

* Climate Change, Mitigation, and Resilience...64

* 1. Climate-Related Risks and Catastrophic Events...64

* Box 3: Residual Markets...66

* 2. Responding to Climate-Related Executive Orders...67

* 3. Mitigation and the Mitigation Framework Leadership Group...69

* 4. National Flood Insurance Program...70

* 5. State Climate-Related Efforts and Response to Catastrophic Events...70

* 6. International Work...73

* Cyber Risks, Ransomware, and Cyber Insurance...74

* The Cyber Insurance Market and Ransomware's Impact...74

* The Threat of Ransomware...77

* U.S. Cybersecurity and Ransomware Responses...78

* Terrorism Risk Insurance Program...80

* TRIP Data Collection...81

* Small Insurer Study...82

* FIO Advisory Committees...83

* Advisory Committee on Risk-Sharing Mechanisms...83

* Federal Advisory Committee on Insurance...83

* Box 4: Initiatives on Diversity and Inclusion...85

* Personal Auto Insurance...86

* Background...87

* FIO's Current Work on Auto Insurance...90

* Box 5: The Use of Credit Scores in Insurance Underwriting...90

* InsurTech...91

* Long-Term Care Insurance...93

* Financial Stability Oversight Council...95

* State Initiatives on Systemic Risk and Solvency...96

* Macroprudential Initiative and Liquidity Stress Testing Framework...97

* Group Capital Calculation...98

* Box 6: Risk-Based Capital for Bonds and Real Estate...99

* International Developments...100

* IAIS...100

* Covered Agreements...106

* Additional International Engagements...111

IV. CONCLUSION...114

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EXECUTIVE SUMMARY

Introduction: This section explains that this Report is submitted by the Federal Insurance Office of the U.S. Department of the Treasury pursuant to Section 502(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This section also provides a summary of Federal Insurance Office authorities and contains a roadmap to the Report.

Insurance Industry Financial Overview and Outlook: This section provides an overview of the insurance industry from a financial perspective in calendar year 2020.

Domestic Insurance Marketplace Overview: This section provides an overview of the insurance industry's financial performance and condition in 2020. The U.S. insurance industry was able to maintain its financial health in 2020. The sustained low interest rate environment continues to affect the insurance industry's performance. Despite the many impacts of the COVID-19 pandemic, the trend of annual increases in premium continued in 2020.

Financial Performance and Condition Overview: This sub-section focuses on the financial performance and condition of the 676 life & health insurers, the 2,614 property & casualty insurers, and the 1,260 health insurers licensed in the United States during 2020. Insurers in the Life & Health sector offer products in two segments: (1) life insurance and annuities; and (2) accident and health products. Insurers in the property & casualty sector offer products that generally protect against the risk of financial loss associated with damage to property or exposure to liability for individuals, families or businesses. The health sector includes companies licensed solely as health insurers or as health maintenance organizations, but is not the focus of the remainder of this Report.

Direct premiums written in 2020 for the life & health sector were approximately $767 billion, for the property & casualty sector were approximately $717 billion, and for the health sector were approximately $834 billion. At the end of 2020, the life & health sector held approximately $8.0 trillion of total assets, the property & casualty sector held approximately $2.4 trillion, and the health sector held approximately $515 billion.

The aggregate market shares of the top 10, 25, and 100 Life & Health insurance companies in 2020 were little changed compared to 2019. For both commercial lines and personal lines, there was little change in the aggregate market shares of the top 10, 25, and 100 Property & Casualty companies in 2020. The health market continued to tighten somewhat at the top, with the aggregate market share of the top 10 writers increasing nearly one-and-one-half percentage points (to 60 percent) from 2019.

Life and Health Sector: This sub-section presents additional analysis of the financial performance of the life & health sector in 2020, and then assesses this sector's overall financial condition as of December 31, 2020.

Property and Casualty Sector: This sub-section presents additional analysis of the financial performance of the property & casualty sector in 2020, and then assesses this sector's overall financial condition as of December 31, 2020.

Market Performance: In 2020, both the property & casualty and the life & health sector stock indices significantly underperformed the S&P 500. Questions related to the potential liability for pandemic-related losses such as business interruption claims weighed on property & casualty company stocks, while the combination of uncertainty around the severity of morbidity and mortality experience from the pandemic and the drop in interest rates put downward pressure on life & health insurer stocks.

Domestic Outlook: This sub-section provides some insights into near-term trends, reflecting observations from 2020 and the first half of 2021.

Capital Markets Activity: This section notes that the U.S. insurance industry continued to access the equity market for new capital throughout 2020. During the year, 17 insurance-related public equity offerings were completed, with an aggregate value of $5.5 billion. Debt markets continued to be the preferred source of additional capital for insurers in 2020.

Mergers & Acquisitions of U.S. Insurers: This sub-section notes, among other things, there were 95 merger and acquisition transactions announced in 2020 involving U.S. insurers and reinsurers, with a total value of $13.4 billion.

Changing Investment Strategies: This sub-section discusses the factors that have prompted the U.S. insurance industry to deploy new investment strategies in recent years.

Alternative Risk Transfer Insurance Products: This sub-section summarizes 2020 developments in the alternative risk transfer market--in which the outstanding amount of catastrophe bonds and insurance-linked securities instruments was approximately $46 billion at the end of 2020--and notes its continuing growth in the first half of 2021.

Private Equity-Backed Insurers: This sub-section observes that private equity-owned life insurers have continued to expand rapidly in the U.S. insurance industry and are now some of the largest providers of fixed annuities and pension risk transfers in the sector.

InsurTech Investments: This sub-section highlights how InsurTech startups continued to receive significant investments in 2020.

International Insurance Marketplace Overview and Outlook: This section concludes that the United States remained the world's largest single-country insurance market in 2020. When viewed as a single market, the combined share of the European Union (following the exit of the United Kingdom) was the next largest. China remained the second-largest single-country insurance market.

Topical Updates and FIO Activities: This section provides updates and analyses, as well as Federal Insurance Office activities, in several areas which the Federal Insurance Office has analyzed over the past year.

Pandemic-Related Updates: This section updates the Federal Insurance Office's previous preliminary observations on the impact of the COVID-19 pandemic on the insurance industry.

Climate Change, Mitigation, and Resilience: This section discusses numerous topics and activities related to U.S. insurance markets and climate change, mitigation and resilience. Among other things, it notes that U.S. insurance markets will play a vital part in achieving the goals set forth in two climate-related Executive Orders. The Federal Insurance Office highlights these Executive Orders, among other things, in its request for information on climate-related financial risks and the insurance sector, published on August 31, 2021. The request for information highlights, among other things, that traditionally underserved communities and consumers tend to have the least access to affordable insurance products and services and are disproportionately impacted by climate change. Mitigation and the availability of insurance is also among the topics addressed in the request for information, as well in this section. This section also discusses the National Flood Insurance Program, noting that flooding is one type of weather-related event that is being exacerbated by climate change. More generally, the section notes how the Federal Insurance Office continues to engage on climate-related issues with state insurance regulators and the National Association of Insurance Commissioners to learn more about their priorities and ongoing efforts to address climate-related risks. The Federal Insurance Office also has engaged on climate-related issues through coordination with international organizations.

Cyber Risks, Ransomware, and Cyber Insurance: This section focuses on the interplay between ransomware and insurance, including the impact of ransomware on the cyber insurance market, and efforts of both federal and state policymakers and regulators to develop responses to the growing threats of ransomware.

Terrorism Risk Insurance Program: This section provides updates on the Terrorism Risk Insurance Program, including its data call and study on small insurers.

Advisory Committee on Risk-Sharing Mechanisms: This section provides an update on work related to the federal advisory committee established by the Terrorism Risk Insurance Program Reauthorization Act of 2015, which provides the Federal Insurance Office with advice and recommendations related to terrorism risk insurance.

Federal Advisory Committee on Insurance: This section provides updates on the work of the advisory committee established to provide the Federal Insurance Office with nonbinding advice and recommendations and to otherwise assist it in carrying out its duties and authorities.

Personal Auto Insurance: This section provides background information on the importance of auto insurance and highlights the Federal Insurance Office's ongoing work relating to personal auto insurance, including the availability and affordability of insurance for traditionally underserved consumers and communities. It also addresses the response of insurers and state insurance regulators to the COVID-19 pandemic in the context of auto insurance.

InsurTech: This section discusses how InsurTech innovation trends have remained consistent in recent years with continued growth in investments, an emphasis on distribution and marketing, additional partnerships between startups and incumbent insurers, and a focus on artificial intelligence. It also discusses regulatory developments involving InsurTech.

Long-Term Care Insurance: This section discusses developments in the private market for long-term care insurance, in which the number of individual long-term care insurance policies sold peaked in 2002 and has decreased in nearly every year since then. The section also discusses ongoing efforts to address long-term care insurance product and market issues.

Financial Stability Oversight Council: This section discusses the involvement of the Federal Insurance Office in the Financial Stability Oversight Council, and Financial Stability Oversight Council activities over the past year.

State Initiatives on Systemic Risk and Solvency: This section discusses how, during the past year, the National Association of Insurance Commissioners has advanced (1) its Macroprudential Initiative through the efforts of its Financial Stability Task Force in connection with the development of the Liquidity Stress Testing Framework and (2) the Group Capital Calculation--the foundation for its capital stress testing regime.

International Developments: This section discusses the Federal Insurance Office's work in international contexts.

International Association of Insurance Supervisors: This sub-section provides an overview of the International Association of Insurance Supervisors, the role of the Federal Insurance Office in it, and updates on its work, including with respect to the Insurance Capital Standard which, after six years of field testing, advanced into a five-year monitoring period in 2020.

Covered Agreements: This sub-section describes and provides updates on the covered agreements with the European Union and the United Kingdom.

Insurance Dialogue Projects: This sub-section describes and provides updates on the EU-U.S. Insurance Dialogue Project, a collaborative effort among U.S. and European Union insurance authorities to increase mutual understanding and enhance cooperation between the United States and the European Union in order to promote business opportunities, consumer protection, and effective supervision, and a similar initiative with the United Kingdom.

OECD: This sub-section provides an overview of the Organisation for Economic Co-operation and Development's Insurance and Private Pensions Committee and its recent work.

Bilateral Dialogues: This sub-section notes that the Federal Insurance Office engages with its international colleagues not only through multilateral forums like the International Association of Insurance Supervisors, but also through additional formal and informal bilateral dialogues.

Conclusion: The Report concludes that, in the coming year, the Federal Insurance Office will continue to address climate-related financial risks, the affordability and availability of insurance products for traditionally underserved communities and consumers, the role of the insurance industry in helping to improve our nation's cybersecurity, and other relevant developments affecting the U.S. insurance industry, policyholders, and consumers.

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CONCLUSION

In the coming year, FIO will continue to address climate-related financial risks, the affordability and availability of insurance products for traditionally underserved communities and consumers, the role of the insurance industry in helping to improve our nation's cybersecurity, and other relevant developments affecting the U.S. insurance industry, policyholders, and consumers.

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The full report and footnotes can be viewed at https://home.treasury.gov/system/files/311/FIO-2021-Annual-Report-Insurance-Industry.pdf

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