Latest Studies - May 2017

Each month the Insurance Information Institute compiles recent studies from industry, government, academic and other sources. Topics include consumer issues, industry trends, climate and environment, and studies covering individual lines of business like automobile liability and workers compensation.

1. THE SPEED OF DISRUPTION AND THE IMPACT ON BUSINESS. THE FOURTH INDUSTRIAL REVOLUTION HAS BEGUN
Charlie Kingdollar
Gen Re Research; 8 pages
April 1, 2017

This report reflects on the rapid advances in automation, robotics and artificial intelligence, referred to by some as the fourth industrial revolution. In 2013 a University of Oxford study concluded that nearly half of U.S. jobs were at risk for automation, and a 2015 report by Forrester Research predicted that by 2019 some one-quarter of all job tasks would be off-loaded to software robots, physical robots, or customer self-service automation. Charts show the jobs most at risk for automation and automation potential by industry, and the report cites numerous studies on job loss as a result of automation and focuses on specific sectors including automated vehicles, agriculture, manufacturing and white collar jobs. The report also briefly addresses the use of drones and 3-D printers to replace human workers. Finally, the report examines the potential impact on insurers of these changes. Some of the factors to consider include: the cost of robotic hardware's impact on property values; fewer workers leading to fewer occupational injuries but also less premium volume for the workers compensation line; increased productivity leading to costlier business Interruption claims and costs; and product liability from malfunctioning robots. Another way insurers could be affected is replacement of insurance staff with AI. Sam Friedman, insurance research leader with Deloitte’s Center for Financial Services in New York, said that jobs in claims, sales and routine customer service are likely to be supplanted or possibly replaced by automation. Full Report


2. GLOBAL INSURANCE DISTRIBUTION AND SERVICES SECTOR MERGERS AND ACQUISITIONS – THE BEAT GOES ON
Conning; Page N/A
April 1, 2017

This study from Conning reports that while the mergers and acquisitions (M&A) market for distribution and services cooled slightly in 2016 from the prior year, market conditions continue to support high levels of M&A activity going forward. “Consolidation of insurance distributors continued at a rapid pace through 2016 and into 2017,” said Alan Dobbins, a Director, Insurance Research at Conning. “A strong economy has done its part to create a rising tide of increasing exposures and continued attractive financing costs. It seems that M&A has replaced organic growth for many in the insurance distribution sector.” The study tracks and analyzes both U.S. and non-U.S. insurance industry M&A activity across distribution and services sectors. Specific transactions are detailed, and trends are analyzed across both sectors. “We identified 368 distribution related transactions in the U.S.,” said Steve Webersen, Head of Insurance Research at Conning. “The greatest appetites reside with the insurance brokers and their private equity sponsors. As the consolidation has continued over the years, valuations have risen accordingly. However, while demand will likely remain high going forward, the market will have difficulty sustaining these high multiples in the face of rising interest rates.” The study is available for purchase from Conning by calling (888) 707-1177 or by visiting www.conningresearch.com.


3. M&A INSURANCE COMES OF AGE
American International Group; Page N/A
April 5, 2017

This American International Group (AIG) study of representation and warranty claims related to international mergers and acquisitions spanning from 2011 to 2015, shows a marked increase in claims frequency year-on-year. Whereas last year’s report showed claims on policies issued during the period 2011 to 2014 reflecting a frequency of around one-in seven (an average of 14 percent overall), that number has jumped to more than one-in-five (or an average of 21 percent) on that same group of policies, now that an additional year has passed. However, when policies issued during 2015 are added to the pool, overall frequency is 18 percent, four percentage points higher than the numbers reported last year. Full Report


4. FLOOD INSURANCE: COMPREHENSIVE REFORM COULD IMPROVE SOLVENCY AND ENHANCE RESILIENCE
U.S. Government Accountability Office (GAO); Page N/A
April 27, 2017

In this report, GAO focuses on potential actions that can help reduce federal fiscal exposure and improve resilience to flood risk. Congress created the National Flood Insurance Program (NFIP) to reduce the escalating costs of federal disaster assistance for flood damage, but also prioritized keeping flood insurance affordable, which transferred the financial burden of flood risk from property owners to the federal government. In many cases, premium rates have not reflected the full risk of loss, so NFIP has not had sufficient funds to pay claims. As of March 2017, NFIP owed $24.6 billion to Treasury. NFIP's current authorization expires in September 2017. GAO recommends that to improve NFIP solvency and enhance national resilience to floods, Congress should consider comprehensive reform covering six areas: (1) outstanding debt, (2) premium rates, (3) affordability, (4) consumer participation, (5) barriers to private-sector involvement, and (6) NFIP flood resilience efforts. Comprehensive reform will be essential to help balance competing programmatic goals, such as keeping flood insurance affordable while keeping the program fiscally solvent. Taking actions in isolation may create challenges for some property owners (for example, by reducing the affordability of NFIP policies) and therefore these consequences also will need to be considered. Some of the potential reform options also could be challenging to start or complete, and could face resistance, because they could create new costs for the federal government, the private sector, or property owners. Nevertheless, GAO's work suggests that taking actions on multiple fronts represents the best opportunity to help address the spectrum of challenges confronting NFIP. Full Report


5. MUNICIPAL BONDS FACE UNCERTAIN REGULATORY ENVIRONMENT
A.M. Best Special Report; Page N/A
April 10, 2017

This A.M. Best report states that federal tax policy changes are becoming increasingly more likely to occur and will undoubtedly impact operating and investment decisions of insurance companies. U.S. insurance companies' municipal bond holdings rose by more than 10 percent over the past five years, as companies looked to replace lower-yielding Treasury securities in their portfolios. However, given the potential for tax reform under the new U.S. administration, along with defaults in recent years, companies may shift their attention away from municipal bonds and turn to other higher yielding assets. Any change to the tax treatment of municipal holdings may encourage companies to pull back from these holdings. At year-end 2015, the municipal bond market stood at $ 3.8 trillion, according to the Securities Industry and Financial Markets Association, and while the overall market declined by 0.6 percent in the five-year period ending in 2015, municipal holdings by insurance companies in that time increased by 10.2 percent. The approximately $515.6 billion of municipal bond holdings held by the insurance industry in 2015 was dominated by the property/casualty segment, which accounted for 63.7 percent of municipal debt held by the industry, followed by the life/annuity and health segments at 29.4 percent and 4.0 percent, respectively. Given the impact of possible tax changes, A.M. Best will closely monitor the investment composition of rated entities and the tax environment as it relates to municipal holdings. The report is available for purchase from A.M. Best.


6. NEW USGS MAPS IDENTIFY POTENTIAL GROUND-SHAKING HAZARDS IN 2017
United States Geological Survey; Page N/A
March 1, 2017

The United States Geological Survey (USGS) has published a new set of maps identifying potential ground-shaking hazards in 2017 from both human-induced and natural earthquakes in the central and eastern United States. This is the second consecutive year both types of hazards are forecasted, as previous USGS maps only identified hazards from natural quakes. About 3.5 million people live and work in areas with significant potential for damaging shaking from human-induced seismicity in 2017, mostly in Oklahoma and southern Kansas. An additional half million people face a significant chance of damage from natural earthquakes in 2017. Overall seismic hazard for 2017 is lower than in the 2016 forecast, but despite this decrease, there is still a significant likelihood for damaging ground shaking. The 2017 forecast decreased compared to last year because fewer felt earthquakes occurred in 2016 than in 2015. This may be due to a decrease in wastewater injection resulting from regulatory actions and/or from a decrease in oil and gas production due to lower prices. Despite the decrease in the overall number of earthquakes in 2016, Oklahoma experienced the largest earthquake ever recorded in the state as well as the greatest number of large earthquakes compared to any prior year. The chance of damage from induced earthquakes will continue to fluctuate depending on policy and industry decisions, said Mark Petersen, chief of the USGS National Seismic Hazard Mapping Project. “The forecast for induced and natural earthquakes in 2017 is hundreds of times higher than before induced seismicity rates rapidly increased around 2008,” said Petersen. Induced seismicity poses the highest hazard in Oklahoma and southern Kansas and the Colorado-New Mexico area known as the Raton Basin. Enhanced hazard from induced seismicity was also found in Texas and north Arkansas, but the levels are significantly lower in these regions than that forecasted for 2016. While earthquakes are still a concern, scientists did not observe significant activity in the past year, so the forecasted hazard is lower in 2017. There is also a high hazard for natural earthquakes in the New Madrid Seismic Zone. Which has had a higher rate of natural earthquakes in the past three years, leading to a slightly higher hazard potential compared to previous years in portions of Arkansas, Missouri, Illinois, Kentucky and Tennessee. Full Text.


7. EVERDRIVE SAFE DRIVING REPORT 2016-2017
Everquote; Page N/A
April 1, 2017

This report is based on data gathered through Everquote's EverDrive app that tracked participating drivers' safe driving behaviors including speeding, cellphone use, acceleration, braking and turning. Nationally, drivers received an average safe driving rate of 79 out of 100. The study found that speeding, not phone use scored the lowest national average safety rating of 79 out of 100, closely followed by phone use (80), hard braking (83), risky acceleration (85), and hard turns (86). The report also ranks drivers by region with drivers in the Midwestern states scoring the highest safe driving rating of 83 out of 100, compared to the West (82), South (80), and Northeast (75). Full Report


8. BIG DATA AND REGULATION IN THE INSURANCE INDUSTRY
Lawrence S. Powell
University of Alabama Center for Insurance Information and Research; 25 pages
April 28, 2017

The author of this study contends that the current regulatory framework is well suited to address Big Data concerns, and that if insurers and regulators work together consumers can quickly reap the full benefits of Big Data. He dismisses concerns about the opacity and complexity of Big Data because regulators can reject rate filings unless or until insurers and vendors explain their applications to the regulators’ satisfaction. He also dismisses concerns about bias since Big Data applications are less biased than any other potential method of claims handling; in fact, Big Data can mitigate problems of bias if they exist in the claims process. The benefits to consumers from Big Data include more accurate pricing, improved customer claims satisfaction, faster claims payments, improved online customer experience and new insurance products to meet consumer demands. Big Data applications can also increase the availability of coverage in areas and exposures that are otherwise difficult to underwrite. Catastrophe models, telematics and satellite imagery are all examples of this effect. Big Data applications are effective in identifying and mitigating insurance fraud, presenting an opportunity to cut the estimated $40 billion annual cost of fraud. It could also improve insurers’ operational. An example is to pre-fill insurance applications using public and proprietary data. This makes it easier for consumers to shop for insurance and bolsters competition. The study describes current laws and regulations as evidence that regulators have the needed tools to protect consumers and maintain a functional market. Also noted is the lack of consumer complaints uncovered by the NAIC Big Data Task Force, and that insurance markets are competitive, therefore providing important consumer protections. Full Report


9. CRASH COURSE 2017
Susana Gotsch
CCC Information Services; 60 pages
March 1, 2017

This detailed annual collision data report from CCC Information Services argues that trends in vehicle telematics and connectivity have reached a point where they are beginning to disrupt the auto claims ecosystem. The report examines how rapidly advanced technology is driving change for the consumer, the vehicle, the insurer, the repairer, the parts provider and the manufacturer. The report says that the average repair shop would need to measure itself against the rest of the industry with data like average repair costs, labor rate, repair hours and parts usage. The report is replete with other charts, including the number of drivers by region, the growth of miles driven, population increases in areas that have seen some of the most severe weather over the last year, decline of personal vehicle use in commuting and growth of ride hailing services, new vehicle sales, the results of an auto insurance customer claims satisfaction survey, accidents and fatalities and the growth of automotive technology and bodily injury claims. Full Report


10. GLOBAL CLAIMS REVIEW – LIABILITY IN FOCUS
Allianz Global; Page N/A
March 30, 2017

This Allianz Global analysis of more than 100,000 global liability claims found that defective product and work incidents are the top cause of liability losses for businesses (23 percent of the value of all claims received). Rising numbers of these incidents in today’s complex global supply chains can result in larger claims, which are more challenging to settle. Despite safety improvements, collisions or crashes are still a major driver of liability loss, accounting for more than a fifth (22 percent) of the value of all claims. Human error is the third top cause of liability loss (19 percent), although it accounts for around just 1 percent of all claims received by insurers. While this loss category focuses on the impact of everyday employee errors in the workplace, it also includes the effect of much larger events where human error has been a factor, such as in aviation or shipping accidents. The report concludes that technology will be a major factor in liability claims in the coming years. Workplace accidents are expected to be less common in what are known as smart factories, and accident rates are expected to decline dramatically as driverless cars become common. Automation will probably lead to increased product liability, particularly for the manufacturing of machinery and components and the development of software. The report breaks down liability losses by selected countries and regions. The report also includes a brief section devoted to animal related claims. It notes that deer collisions with vehicles accounted for 58 percent of animal related liability claims followed by bedbug related incidents with 21 percent. Full Report


11. 2017 RISK MAPS. AON'S GUIDE TO POLITICAL RISK, TERRORISM & POLITICAL VIOLENCE
Aon; Page N/A
April 1, 2017

This annual report, produced by Aon in conjunction with Roubini Global Economics and The Risk Advisory Group, found that companies with domestic and international operations face a rise in terrorism risk as attacks increased by 14 percent in 2016, and the risk of attacks in the United States increased. While terrorist attacks increased globally, the biggest rate of increase was in Western countries, where terrorism attacks increased by 174 percent. The West still ranked as the region with the fewest number of attacks, with 96 in 2016. The Middle East had the highest number of terrorist attacks followed by South Asia and sub-Saharan Africa. The oil and gas sector was the area of business most targeted by terrorists. The terrorism threat in the United States increased for 2017, and the report predicts an increase in global political violence. Another key trend is the surge in populist nationalism, particularly in Western countries. Full Report


12. FUTURE CITIES. BUILDING INFRASTRUCTURE RESILIENCE
Lloyd's of London; Page N/A
March 1, 2017

The Lloyd’s City Risk Index found that $4.6 trillion of the projected GDP of 301 of the world’s leading cities is at risk from 18 threats over the next decade. The report notes that global exposure to disasters has risen over recent decades. It includes for the first time three new pathways that will help city officials, businesses, communities and insurers work together to build greater city resilience. The report contains analysis of each infrastructure category – energy, water supply, information communications technology and transport – and uses case studies to assess past infrastructure failures and to suggest actions that could be taken to avoid them in the future. The case studies comprise Hurricane Katrina (2005), the Mumbai Terrorist Attacks (2008) and the Bangkok Floods (2011). Each example uses insurance learning points. The report also sets out nine actions the insurance industry could take to help improve city resilience. Full Report


If you have a suggestion for a study to be included in this section please email info@iii.org.