All posts by James Lynch

Discover “How Insurance Drives Economic Growth”

By Sean M. Kevelighan,
CEO, Insurance Information Institute

Most people understand insurance as their first line of defense against financial losses. However, the insurance industry’s commitment to a strong economy goes much deeper.

Insurers and reinsurers in many ways are the very foundation of growth and progress for the modern economy. For individuals and businesses of all sizes faced with managing risk amid increasingly complex challenges, insurance is there to ease uncertainties. It’s the safety net that lets families, businesses, and communities plan for future success, confident that they will be able to bounce back no matter what lies ahead.

In a new research study from the Insurance Information Institute (I.I.I.), “How Insurance Drives Economic Growth,” the I.I.I.’s chief economist, Steven Weisbart, lists 10 ways which insurers and reinsurers create value and drive economic growth by serving as “financial “first responders,” risk mitigators, partners in social policy, job-creators, and as a leading investor in innovation.

Through statistics, analysis and insights this publication tells a story that we’re proud of: How insurers not only make individuals and communities more productive and resilient, but also how the industry provides stability to financial markets and the overall economy, and helps to effectuate civic and social change to help promote the common good.

44% of Drivers Killed in Crashes Test Positive for Drugs, Study Shows

Evidence continues to pour in about the increase in drug use by drivers.

From behind The Wall Street Journal paywall:

Drug tests of car drivers killed in crashes in 2016 found more drivers had marijuana, opioids or other substances in their system than a decade ago, a report shows.

The report from the Governors Highway Safety Association, which represents state highway-safety offices, found that 44% of drivers who died and were tested had positive results for drugs in 2016, up from 28% in 2006.

By contrast, the percentage of fatally injured drivers who were tested fell slightly. In 2016 37.9 percent of all drivers with known test results were alcohol-positive, compared with 41.0 percent a decade earlier.

Marijuana was the most commonly detected drug; 38 percent of those testing positive had marijuana in their system. Sixteen percent tested positive for opioids. Another 4 percent had marijuana and opioids. (The rest tested positive for other drugs.)

The report calls for a series of actions to combat driving while under the influence of opioids and alcohol, including:

  • Adding drug-impaired driving messages to impaired-driving campaigns.
  • Training patrol officers to spot impaired drivers and Drug Recognition Experts (remember there is no commonly accepted breath test for drugs other than alcohol).
  • Monitoring the development of marijuana breath test instruments.

Reminder: Highway Loss Data Institute research shows that states that legalized recreational marijuana sales see a significant increase in accident rates. And here at Triple-I we have presentations discussing the science of driving while high as well as the disconnect between what people know (don’t ride with a high driver) and what they do (too often they say they will).

Update: A webinar discussing the report will be held on June 5 at 1 p.m. EDT. Register at bit.ly/GHSA-DUIDwebinar.

From the I.I.I. Daily: Our most popular content, May 25 to May 31

Here are the 5 most clicked on articles from the I.I.I. Daily newsletter.

  1. Today’s Uncertain Economy: Implications for P/C Insurance (III Presentation)
  2. Root Insurance wants to do to auto coverage what Amazon has done to retail (Columbus Dispatch)
  3. Uber Self-Driving Car That Struck, Killed Pedestrian Wasn’t Set to Stop in an Emergency (Wall Street Journal)
  4. The Places in the U.S. Where Disaster Strikes Again and Again  (New York TImes)
  5. ‘No words to describe the devastation’ after Ellicott City flooding in Maryland (USA Today)

To subscribe to the I.I.I. Daily email daily@iii.org.

Fitch: P/C Insurers Financially Prepared for Hurricane Season

Via Business Insurance:

U.S. insurers are well prepared at the start of the 2018 hurricane season to withstand a significant catastrophe this year after suffering through last year’s volatile hurricane season, according to Fitch Ratings Inc.

Fitch cited a 7.5 percent increase in surplus last year, to a record $765 billion.

Surplus grew thanks to healthy investment gains, Fitch noted, which more than offset hurricane-driven underwriting losses. U.S. insurers ceded a significant portion of catastrophe losses to offshore reinsurers and alternative capital. And much of the flood loss in the Houston area from Hurricane Harveywere borne by the National Flood Insurance Program.

The heavy reinsurance losses did cause the bottoming out of rates in property and catastrophe reinsurance, Fitch indicated, but increases were “not to the degree that many market participants had anticipated.”

Updated 2018 Atlantic Hurricane Season Outlook: Cooler Atlantic Temperatures Could Lead to Below-Average to Near-Average Hurricane Season

Special to the Triple-I Blog

by Philip Klotzbach,Ph.D,
Research Scientist, Department of Atmospheric Science, Colorado State University and I.I.I. Nonresident Scholar

Colorado State University (CSU) has just updated their outlook for the 2018 Atlantic hurricane season, and is now calling for a near-average season with a total of 14 named storms, six hurricanes and two major hurricanes (maximum sustained winds of 111 miles per hour or greater; Category 3-5 on the Saffir-Simpson Wind Scale) (Figure 1).  This prediction is a slight lowering from their initial outlook in early April which called for 14 named storms, seven hurricanes and three major hurricanes.  Accumulated Cyclone Energy (ACE) and Net Tropical Cyclone (NTC) activity are integrated metrics that take into account the frequency, intensity and duration of storms.

Figure 1: May 31, 2018 outlook for the upcoming Atlantic hurricane season

CSU’s meteorological team uses a statistical model as one of its primary outlook tools.  This methodology applies historical oceanic and atmospheric data to find predictors that were effective in forecasting previous years’ hurricane activity. Based on data dating back to 1982, this model has shown consistent accuracy. (Figure 2)  Statistical forecast for 2018 is calling for a below-average season.

Figure 2: Accuracy of June statistical forecast model at predicting historical Atlantic hurricane activity (since 1982)

CSU also employs an analog approach, which uses historical data from past years with  conditions that are most similar to those currently observed (as of May 31, 2018).  The team also forecasts projected conditions during 2018 peak hurricane season (August-October) by looking at historical data from years with similar August-October conditions.

This approach yields a similar outlook of below-average to near-average sea surface temperatures (SSTs) in the tropical Atlantic and near-average sea surface temperatures in the eastern and central Pacific.  The average of the four analog seasons calls for a near-average season. (Figure 3)

Figure 3: Analog predictors used in the May 31, 2018 seasonal forecast

CSU does not anticipate a significant El Niño event for the peak of the Atlantic hurricane season.  At this point, the meteorological team believes that the most likely outcome is neutral conditions for the next several months.  El Niños tend to reduce Atlantic hurricane activity through increases in upper-level winds that tear apart hurricanes as they are trying to develop.  Most of the dynamical and statistical model guidance agrees with this assessment and calls for neutral conditions for the next several months. (Figure 4)

Figure 4: Statistical and dynamical model guidance for El Niño

Most models are calling for neutral conditions for August-October, as highlighted by the black arrow. (Figure courtesy of International Research Institute for Climate and Society.)

The primary reason for a reduced seasonal forecast (compared with earlier 2018 outlook), is due to anomalous cooling of the tropical Atlantic over the past couple of months.  As shown in Figure 5. most of the Atlantic right now is quite a bit cooler than usual. In addition to providing less fuel for storms, a cooler tropical Atlantic is also associated with a more stable and drier atmosphere as well as higher pressure—all conditions that tend to suppress Atlantic hurricane activity.

Figure 5: Current SST anomalies in the North Atlantic.  SSTs are much cooler than normal across the entire tropical Atlantic

The most important thing to note with all seasonal forecasts is that they predict basinwide activity and not individual landfall events.  However, regardless of what the seasonal forecast says, it only takes one storm near you to make it an active season.  Therefore, coastal residents are urged to have a plan in place now before the hurricane season ramps up over the next couple of months.

Extra: If you live in a hurricane-prone region, your homeowners insurance policy may have a separate hurricane deductible. This infographic explains what you need to know.

The Ellicott City Flood: Rebuilding Begins with Resilience

By Sean Kevelighan, CEO, Insurance Information Institute

On May 27, for the second time in three years, Ellicott City, Maryland was ravaged by what meteorologists term a “1,000-year flood”—this while some businesses were still celebrating the one-year anniversary of their reopening after the August 2016 catastrophe.

As affected households and businesses assess the damage and pledge to rebuild (or to relocate) after this deadly event, one fact looms largest: that 1,000- or 100-year floods now seem to strike with numbing regularity. The time has come, then, for communities and individuals to accept this paradigm shift by embracing resilience.

Local, state and federal governments have a wide range of tools at their disposal to effectuate resilience, including public policy solutions and rebuilding/retooling critical infrastructure to withstand greater stresses. However, for business owners, homeowners, and renters, the most important step they can take is to close the “coverage gaps” that expose them to massive uninsured losses that can delay or prevent recovery. And for regulators and insurers, this creates an excellent opportunity for public/private solutions to meet this growing challenge head-on.

Lloyd’s loosens its tie (rules)

Had a different post planned for today, but this article about Lloyd’s of London, from behind the Financial Times paywall is the perfect segue into the Memorial Day Weekend:

… over the past few months the insurance market has quietly started to relax its strict tie policy. While it has not yet formally repealed the rule, it is no longer enforcing it strictly.

A spokesperson for Lloyd’s said that the new policy was “in keeping with the norms of business dress in the City”.

One underwriter who works at Lloyd’s welcomed the move. “It’s the right thing to do,” he said. “If you had walked around without a tie 10 years ago it would have been the same as wearing a yellow mankini but this is part of general modernisation.”

… could do without the mankini reference, though.

The “After Glow” of Tax Reform Politics Too Good to Pass Up for Anti-Insurance Crowd

By Sean Kevelighan, CEO, ‎Insurance Information Institute

After the Tax Cut and Jobs Act of 2017 passed late last year, the Insurance Information Institute received numerous queries about the impact on property/casualty insurers. Given our mission at I.I.I. is not rooted in direct lobbying advocacy, we consciously refrained from engaging in what was sure to be (and was, in fact) a political battleground in some areas during the legislative process. That said, the industry deserves credit for coming together in many ways to ensure insurance receives fair treatment — a lesson learned from 1986 when the industry was sidelined.

While the anti-insurance crowd (most often misleading themselves as “pro consumer” groups) has been quick to add political rhetoric in the form of baseless and wildly exaggerated claims the industry will receive a “windfall” of income, the I.I.I. will, once again, adhere to facts that are based on actuarial and economic soundness.

Objectively, the I.I.I. sees the overall benefits to tax reform for the insurance industry to be well under 1 cent for every premium dollar.

How do we get that estimate?

Equity analysts at J.P. Morgan estimate tax reform would be about 5 percent of industry earnings, which seems reasonable based on what we know. In 2016 – 2017 industrywide results aren’t out yet – net income was $42.6 billion. Five percent of that would be a bit over $2 billion – more than I have in my pocket, but only about one-third of 1 percent of the $600 billion the industry wrote that year.

Here are a couple of other things to consider about insurers and taxes:

  • Insurance companies pay a wide variety of rates. They pay one rate on underwriting profits, another on dividends from preferred stock, another on bond payments and yet another on municipal bond payments which are almost, but not quite, tax-free. The headline rate fell considerably, but many of the other rates didn’t change at all.
  • Some companies may get a tax increase. Foreign-based groups that have historically ceded a portion of their U.S. business to an offshore affiliate based outside the U.S. are now subject to the Base Erosion and Anti-Abuse Tax – call it BEAT. However, the reduction in the overall tax rate may offset the other changes, depending on each company’s circumstances.

It is important to understand that insurance costs will quickly adjust to the new tax reality. Insurers in the largest lines – personal auto and homeowners – adjust their rates annually – sometimes more frequently. The rate – by law – explicitly reflects every cost an insurer incurs, including taxes. When the tax law changes, insurers build the new rate into their models.

Much like any business in America, insurance will use some of the benefits to invest — in its employees, products and services — so as to improve and grow. Given the industry is the second largest financial services contributor to our economy (2.8% of GDP), employing nearly 3 million Americans, it is critical that insurers make their own decisions.  If not, then where does the line get drawn? Next, the anti-business crowd would (or perhaps already has) call on other industries to make uneconomic pricing decisions.

Update: This blog post has been changed to clarify information regarding the BEAT tax.

Commentary by I.I.I. chief actuary published in law review

Commentary on workers compensation insurance by I.I.I Chief Actuary James Lynch is being published in the upcoming issue of the Rutgers University Law Review.

Lynch’s piece, “Comment to Economic Incentives in Workers’ Compensation: A Holistic International Perspective,” was written in response to an article by Stanford Professor Alison Morantz and others. The two spoke at a 2015 conference about the Grand Bargain in workers compensation.

Speakers discussed whether recent events were jeopardizing the so-called ‘Grand Bargain’ – workers forfeit their right to sue for on-the-job injuries in exchange for predictable benefits from a no-fault system. Professor Morantz’s article compared social safety net programs (including workers comp) worldwide and “discusses several mounting pressures that are jeopardizing the capacity of the U.S. workers’ compensation system to carry out its intended goals.”

In his response, Lynch noted that much of the current research in U.S. workers compensation “involves finding ways to reduce incentives that drive costs higher with no discernable benefit to the worker.” One example cited: When New York doctors book surgery for comp patients in New Jersey, they charge an average of $4,954, or 266 percent more than if the same surgery with the same surgeon took place in New York. (The I.I.I Blog featured this research two years ago.

Neither Morantz’s nor Lynch’s article was online as of February 16, but both should become available at the law review website soon.

WCRI conference: The annual deep dive into workers comp

If I were to pick out the hottest topics in workers compensation these days, these three would be near the top:
• Opioids.
• Marijuana.
• How technology will affect the industry.
All three will be prominently featured at the Workers Compensation Research Institute’s Annual Issues & Research Conference March 22 and 23 at the Westin Copley Place, Boston.
The research organization, known by its acronym, WCRI, has for more than three decades conducted deep, objective research into what makes the workers comp system tick. Its conference annually hosts about the deepest dive you can find into the intricacies of the largest commercial line of business. I attend every year, and am happy for the privilege.
This year attendees will hear the latest on how opioids affect the ability of workers to return to their job; how Americans deal with prescription drugs in the workplace; and how a major employer – United Airlines – addresses the issue.
And a University of Georgia researcher, Dr. David Bradford, will discuss his studies on the effect of medical marijuana programs on prescription drug spending.
And opening speaker Erica L. Groshen, former head of the U.S. Bureau of Labor Statistics, will look at how artificial intelligence, robots, driverless cars and such will affect the labor force. From the conference website:

She will argue that much of the hype about the future of work is either far too optimistic or to pessimistic. In addition, she will talk about how the official statistics are more important than ever.
They are the information infrastructure that we all need to see through the haze, so that we make good decisions for our companies, our communities and ourselves.

Conference details are here.