Increase in owner-occupied homes leads to growing insurance exposures

By Steven Weisbart, Chief Economist, Insurance Information Institute

 

For a dozen years – from 2004 through 2016 – the number of owner-occupied homes in the U.S. was virtually unchanged at about 75 million, even though the population grew by more than 30 million during that time span. In the same period, the number of renter-occupied residences spiked – from about 33 million to about 43 million. Both trends persisted through the Great Recession, and on into the recovery, during which time mortgage interest rates plummeted, and many homes went on the market at bargain rates, thanks to foreclosure or short sales.

The implications of these trends for the homeowners and renters insurance exposure bases are easy to see: very little exposure growth in the homeowners market – except for renovation of existing homes and total replacement of older homes with newer ones – and substantial exposure growth (about 30 percent) in the renters market. Premium growth in these lines were affected, since the vast majority of owner-occupied homes are insured, but only 40 percent of renters buy renters insurance.

Based on data released by the Census Bureau on July 26, 2018, we feel confident in saying that these trends have reversed. The number of owner occupied homes as of the second quarter of 2018 is nearly 78 million, and it has increased in every quarter except the third quarter of 2016. The number of renter-occupied homes was 43.9 million in the third quarter of 2016, but dropped to about 43 million by the second quarter of 2018.

As a result – even ignoring the increasing cost of rebuilding damaged homes and content – if the trend holds, homeowners insurers should expect to see a growing exposure base in this line.

 

Is relief in sight for personal and commercial auto claims?

By Steven Weisbart, Chief Economist, Insurance Information Institute

 

 

About three years ago the Insurance Information Institute noticed a strong correlation between the number of people employed and the amount of driving done, as measured by the U.S. Department of Transportation’s monthly survey of vehicle-miles traveled. Of course, it is reasonable to expect that as more people hold jobs, most would drive to work. And as those who had been unemployed gained incomes, they would also logically be likely to drive more for leisure.

Further, we noticed another strong correlation between vehicle-miles traveled, on the one hand, and the collision paid claim frequency rate (as captured by Fast Track Monitoring Service), on the other—which is also a logical relationship. This, in addition to other factors, such as an increase in distracted driving, higher speed limits on some roads and other causes, helped explain the unusual spike in the frequency of auto insurance claims in 2015 and again in 2016.

However, lately these relationships appear to be weakening. For example, the year-over-year increase in vehicle-miles traveled was more than 2 percent in 2015 and 2016, and despite continued steady growth in the number of people employed, was 1.5 percent in the first half of 2017, just under 1 percent in the second half of 2017, and under 0.5 percent in the first five months of 2018 (the latest data available).

It’s possible that the rise in the price of gasoline is affecting vehicle-miles traveled. For most of 2016 the retail price of a gallon of gas (all grades) was less than $2.40, but for the first half of 2017 it averaged $2.50 and for the second half of 2017 averaged $2.65. For the first half of 2018 the average was roughly $2.85.

The collision paid claim frequency rate has also flattened, echoing the pattern of vehicle miles traveled. These new patterns suggest that the beleaguered private passenger and commercial auto claims might finally see some relief following a few years of combined ratios well north of 100.

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What a driverless future means for auto insurance

The American public is skeptical about giving up control of their cars’ steering wheels. Despite the enthusiasm with which autonomous vehicles (AV) are being developed by auto manufacturers and technology companies, recent polls, including this one, showed that few drivers are interested in giving up control of their cars despite the potential safety and time-saving benefits.

And although there’s a long way to go (about 25 to 30 years) before the AV future takes hold, it’s not too early for auto insurers to think about how self-driving cars will affect them.

Haden Kirkpatrick, Head of Innovation & Strategy at Esurance, likens the advent of driverless cars to the beginning of the era of the horseless carriage in the 1890s. Since the first auto policy was sold in 1898, car insurance has evolved from simple handwritten contracts to the high-tech global industry that it is today.

And just as the transition to “horseless” spurred great changes in the early 20th century, the transition to “driverless” will likely mean big changes once again. This time, instead of creating the need for more personal coverage, the move to AV is set to drive the need for more commercial insurance as car manufacturers will assume much of the risk for this new tech.

Kirkpatrick says that it’s too soon to determine where exactly insurers strategy should go. “Where is the vehicle category going to end up? We don’t know yet, 10 to 25 years is a long way down the road.”

What we do know is that technology companies and auto manufacturers (OEMs) are capturing reams of data all the time, and that data can be used for actuarial models. Insurers also will need to form partnerships with the winners in the AV space.

“Insurers are having conversations (with OEMs) to solve problems and pain points. Data is central – a lot of benefits are to be gained with partnerships.”

Where does AV commercial liability responsibility lie?

The terms liability and responsibility begin to break down when there are multiple parties involved, said Kirkpatrick. “When fault is divided between consumer, manufacturer, [and the] software maker, – in the short term there is a mixed environment.” Managing the “ratio of responsibility” will be one of insurers’ biggest tasks.

So, when does the consumer exit the ratio of responsibility?  “One scenario is when the steering wheel is gone, the consumer’s responsibility could be gone,” said Kirkpatrick.

What about the semi-autonomous cars that are on the road now?

The cost benefit of driver-assist features such as adaptive cruise control is not translating into lower insurance costs. “As frequency declines, severity increases, [because of] higher parts and labor costs.” However, preventing the average fender bender involving adaptive cruise control will provide a good baseline to understand the bigger challenges and will help bridge gap in 10 to 15 years.

 

The most dangerous risks for insurers – a midyear review

Cybercrime tops the list of the most dangerous risks for insurers in Willis Re’s midyear review of issues likely to keep insurance executives up late at night.

Specifically, the most omnipresent cybersecurity problems to date are Meltdown and Spectre, two hardware vulnerabilities built into the chips of almost every server, computer and mobile device.

Not far behind is the threat of falling into the information technology gap. Most insurers surveyed by Willis have just completed, are in the middle of, or are planning a major IT systems overhaul. They report a concern surrounding the expense of constant updates and at the same time the risk of not being able to satisfy customer service expectations by falling behind on the latest upgrades.

Some of the other risks on the list include: Strategic direction and missed opportunities, particularly in homeowners insurance; pricing and product line profit; runaway frequency or severity of claims; and disruptive technology; and competition.

 

Automated Vehicle Symposium: Recap

The Automated Vehicle Symposium took place in San Francisco July 9-12.  I.I.I.’s Brent Carris files this report.

Gaining consumer trust is essential to the success of automated vehicle (AV) deployment. It was a point stressed continuously throughout the conference.

U.S. Department of Transportation (DOT) Secretary, Elaine Chao, along with many others, noted that 94 percent of auto accidents occur due to human error. AV control can drastically reduce human error-caused accidents but reaching the “0” level of accidents will be a long work in progress. Joint data sharing by public and private institutions is imperative in the transition to an AV world.

During Secretary Chao’s keynote address, she emphasized the six principles that govern DOT policy for AV technology regulation:

  • Safety is top priority
  • Policies will be flexible and tech-neutral
  • Regulations will be performance based
  • The DOT will collaborate with states and localities
  • The Department will provide stakeholders with assistance to facilitate the safe integration of AV systems into the transportation system, and;
  • The Department recognizes that autonomous vehicles will have to operate side-by-side with traditional vehicles, in both urban and rural areas

Chao briefly discussed insurance, saying “Insurance frameworks are adaptable to the AV world.” Timely data sharing by auto manufacturers and other AV data collectors with insurance companies will be necessary to facilitate proper insurance coverage. Data could be used to establish: Liability in the event of an accident; accurate underwriting and pricing of insurance policies; risk mitigation and control measures. Insurance companies will have to take a proactive approach to ensure timely data sharing and develop consumer perceptions on safety, liability, and coverage for AVs.

In a white paper issued to coincide with the event, the Travelers Institute outlined its views on how autonomous vehicles will change the personal and commercial auto insurance markets.

The DOT announced the third iteration of its Automated Vehicles policy document is slated for release by the end of 2018. The Automated Driving System 2.0: A Vision for Safety was downloaded over 125,000 times since its release in 2017. The 3.0 version will focus on AV development across all modes of transportation – passenger vehicles, trucks, rail, and maritime.

Another important topic was preparing U.S. workers and employers for the automated vehicle future. Lessons from past transitions show that while initial job displacement may occur, full employment eventually returns.

A Securing America’s Future Energy (SAFE) study estimated that the advent of AVs are projected to increase the unemployment rate to a small degree in the 2030s and to a somewhat larger degree in the late 2040s, with a peak, temporary addition to unemployment rates of 0.06–0.13 percentage points. However, an estimated $800 billion will eventually be gained in annual societal benefits due to accident reduction (economic impact and quality of life improvements), congestion mitigation, reduced oil consumption and from the value of time gained from AV. Many speakers stressed that planning for an AV future should start now.

 

 

AIMU Volunteers to help restore the NY Harbor ecosystem

Team members of the American Institute of Marine Underwriters (AIMU) are about to have a lot of fun while helping New York City’s environment when they participate in an annual Volunteer Day with the New York Harbor School on Governors Island on August 30th. The team will be helping with the Billion Oyster Project, an initiative to add, you guessed it, a billion oysters to the New York Harbor water by 2035.

Oyster reefs once covered over 220,000 acres of the Hudson River estuary. They provided valuable ecosystem services to the region by filtering water and providing a habitat for other marine species. A single oyster can filter about 30 to 50 gallons of water every day.  And New York City was virtually built from oysters.  Many building projects depended on the mollusks’  shells for lime, and one could not walk down the street without tripping over an oyster vendor, the hot dog cart of its time.

Today, oysters are functionally extinct in the Harbor due to over-harvesting, dredging, and pollution. The Billion Oyster Project is working to change that, with over 25 million oysters already planted in the harbor and 800,000 pounds of shell recycled. It’s fitting that AIMU is helping to keep the marine environment clean and healthy for future generations. Sponsorship opportunities are available.

Auto insurance and inflation

Dean Baker and Matt Harmon, writing for the Center for Economic and Policy Research blog, analyzed various methodologies of measuring price changes in auto insurance: the Consumer Price Index (CPI), the Personal Consumption Expenditure deflator and what they refer to as I.I.I. data (average expenditures published by the NAIC). Their comments appear to be driven by the April 2018 report of the Bureau of Labor Statistics that the price of auto insurance in the CPI rose by 9.0 percent over the price in April 2017.  This observation leads to the claim that auto insurance “has passed medical care as a driver of inflation.”

The blog post takes a number of tangents—on health insurance, on the different methodologies used by the CPI and the PCE deflator—and then turn to the observation that what people actually pay for auto insurance isn’t increasing very much at all. They infer that because the cost of auto insurance is rising in the CPI, and at the same time the Bureau of Labor Statistics consumer expenditures survey shows that auto insurance spending remains constant, consumers must be offsetting higher prices by buying less insurance.

In the comments section of the post, I.I.I.’s chief economist, Dr. Steven Weisbart addresses Baker and Harmon’s analyses of the various measurements of auto insurance costs and refutes the assumption that policyholders are assuming more risk as opposed to comparison shopping for cheaper polices, for example.

His full response appears below.

Dean Baker and Matt Harmon are correct that “there are aspects to the issue [of measuring inflation in insurance] that are informative about how we measure and think about inflation,” but their analysis is mistaken.

The CPI does, in general, aim to measure price changes in “quality-adjusted” goods and services. Its method for doing this for auto insurance is, unfortunately, seriously deficient. This is because auto insurance premiums are expected-cost driven. (By law, insurers cannot charge to make up for losses in prior years or charge in one state to make up for losses in another state.) Further, premiums are set based not only on expected claims (and claims adjustment expenses, including litigation defense for some third-party collisions), but also on expected investment income from the period between collection of the premium and the payment of a claim. The BLS methodology for determining current prices for auto insurance does not—indeed, cannot—capture these forces. Without recognizing them, premium increases in the current year over the prior year is mistakenly perceived as inflation.

In the last few years, there has been a dramatic upsurge in both the frequency and severity of auto insurance claims, both private passenger auto and commercial auto. Although severity (the average dollar cost of claims, unadjusted for quality improvements in recent years) has been increasing for a long time, increases in frequency (the number of claims per exposure unit) have been unusual and have been rising sharply. The Insurance Information Institute has discussed this in a white paper, identifying some of the major causes of these increases as increased congestion from the continued growth in the number employed, increased distracted driving, and higher speed limits in some cases. Auto insurers did not foresee these changes. They also (with many others) did not foresee the continued low interest rates that delivered lower investment income than they would have earned (and which they would have used to keep premium increases down) and in recent years increased premiums to try to get “ahead of the curve.” These are not inflationary increases in a quality-adjusted financial service.

Moreover, the BLS measure doesn’t try to capture what people pay. It created a hypothetical buyer and asks a panel of insurance companies what they would charge that buyer. The response doesn’t capture discounts that many insurers offer, such as for insuring both auto and home and other coverages with the same company, or for being a long-term policyholder, or being accident-free. As Baker/Harmon recognize, increases in what people pay for auto insurance have been much smaller than the BLS inflation measure. They infer that this means policyholders are assuming more risk. That’s possible, but other inferences are equally possible—such as that comparison shopping has led them to find the same coverage for a lower premium, or that some coverages are no longer cost-effective as their cars age.

Finally, the 9.0 percent year-over-year increase cited by Baker/Harmon is a bit of a cherry-picked datum. On the day the blog post was published, BLS released its CPI report for June 2018. It shows the CPI for auto insurance at 7.6 percent. Further, in two months the auto insurance component of the CPI will likely drop further, since the 12-month figure includes an unusual 0.9 percent increase in August 2017 that is unlikely to be matched in July or August 2018. Note that in the four most recent months of 2018 increases in the auto insurance component of the CPI were 0.3 percent in March, -0.2 percent in April, 0.4 percent in May, and 0.3 percent in June.

 

 

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First ever flood risk catastrophe bond launched

On July 16, FEMA launched its first catastrophe bond to transfer risk from the National Flood Insurance Program (NFIP) to the capital markets, reports the Artemis blog. This will be the first catastrophe bond to solely provide reinsurance coverage for flood risks.

FEMA is seeking $275 million of reinsurance protection from a FloodSmart Re Ltd. (Series 2018-1) issuance. FloodSmart Re, a Bermuda domiciled special purpose insurance vehicle, will seek to issue two tranches of notes that will be sold to insurance linked securities funds to collateralize underlying reinsurance agreements to cover a portion of the National Flood Insurance Program (NFIP) U.S. flood exposure.

The transaction will cover NFIP losses from flood events that are directly or indirectly caused by a named storm event impacting the United States and also Puerto Rico, U.S.  Virgin Islands and District of Columbia.