Interested in the state of the insurance market? Tune in to a free live webcast on Monday, May 20th at 11:20 a.m. ET to watch Insurance Information Institute (I.I.I.) CEO Sean Kevelighan talk about the industry at the Casualty Actuarial Society’s Spring Meeting.
Kevelighan will address the insurance market’s financial performance over the last 15 years with a special focus on rising auto costs and on leadership needed to sustain the business model, create jobs and promote/facilitate economic growth. Plus, he’ll touch on InsurTech and digital transformation in insurance.
No pre-registration is required to watch the webcast, just go to this link at 11:20 a.m. to watch the live session.
The Treasury yield curve inverted last weekend and many are concerned: Sustained inverted yield curves are often harbingers of recession. Insurers could also feel the impact, since the yield curve can influence an insurer’s rates, profits, and portfolio structure.
An inverted yield curve may be cause for concern. According to the Federal Reserve Bank of San Francisco, an inverted yield curve preceded all nine U.S. recessions since 1955. The Fed estimates that typically a recession occurs within two years of the inverted yield curve.
An inverted yield curve is not a perfect predictor of future recessions. There has been one false positive, in late 1966, in which an inverted yield curve was followed by an economic slowdown, not a recession. There have also been several “flattenings” of the curve, which did not lead to recession.
But what makes last week’s shift in the 1- year Treasury curve worrisome is the convergence of other negative signals over the last year – including expected macroeconomic considerations such as the waning of the 2017 tax reform.
How might insurance be impacted by a sustained inverted yield curve?
An inverted yield curve has multiple implications for insurance, some of which depend on the nature of an insurance company’s liabilities and investment profile.
Lower long-term rates hurt insurers whose claims take a long time to settle, like workers compensation. The money set aside to settle those claims gets invested in long-term securities. When those rates fall, insurers enjoy less investment income, which lowers profits. This puts pressure on insurers to raise rates to make up for the lost investment income.
The inverted yield curve also has implications for insurer investments. Given investments in fixed income and real estate, an inverted yield curve will require adjustments to avoid mismatch in obligations and revenues. Remedial actions could include selling assets to realize capital gains because the asset value of the bonds that had been bought at higher rates would now be more valuable.
The yield curve: a brief primer
The “yield curve” is a relationship between 10-year Treasury bond yields and three-month bond yields. Usually, the 10-year bonds have higher yields than three-month bonds, to compensate investors for longer-term risks.
But when there is recession risk and fears of falling interest rates, investors will invest in longer-term bonds to “lock in” at yields that are currently higher than they think will exist in the future. This increased demand for longer-term bonds will, paradoxically, lower yields since bond prices and interest rates are inversely related. At the same time, short-term bond demand goes down (since everyone is running to the long-term bonds), which increases yield.
If this happens, the three-month bonds will have lower yields than the 10-year bonds. And voila: the “normal” yield curve inverts.
The longer the inversion lasts, the higher the odds of a recession in the following quarter. For example, according to the Federal Reserve Bank of Cleveland, the yield curve inverted in August 2006 prior to the onset of the Great Recession in December 2007.
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.”
Third party abuse of assignment-of-benefits is having a negative impact on Florida’s homeowners insurers’ 2017 financial results, according to a recent S&P Global article.
An assignment of benefits occurs when a person with an insurance claim allows a third party to be paid directly by the insurance company. Usually this happens after a claim, when the insured assigns their benefits right to a contractor or whoever is making the repair the claim is meant to cover. A loophole in the Florida law invites abuse of the right and the ensuing litigation drives up costs.
S&P Global’s article showed how the loophole has dramatically increased costs at Florida’s Citizens Property Insurance Corp.
Hurricane Irma by itself made 2017 a challenging one for Florida’s Citizens: over $1 billion in net losses and loss adjustment expenses.
But increased litigation expenses (which show up in insurance statements as direct defense and cost containment expenses incurred (DCCE) – often referred to as allocated loss adjustment expenses) – those hurt a lot too. The ratio of homeowners DCCE incurred to direct premiums earned increased to 16.9% from 15.2% in 2016, the average such ratio for the first 13 years of Citizens’ existence was 2.9%. In other words, litigation costs are almost six times worse than they were just a couple of years ago.
Private insurers in Florida are also reporting the negative impact of litigated assignment-of-benefits claims. Universal Insurance Holdings, Florida’s largest private property insurer, reported that about 12% of its claims from Irma had some aspect of assignment of benefits to them.
So far, legislative reform of assignment-of-benefits abuse remains in limbo.
Despite ample capital and benign claim cost trends, insurers have held the line on trading profitability for volume, while still responding as needed to emerging trends, according to Willis Towers Watson.
The property/casualty insurance industry is facing difficult times. Underwriting gains are becoming losses, premium growth is slowing, and investment yields are shrinking. On the other hand, the industry’s surplus is reaching record highs and some lines and market segments are showing signs of growth.
In this webinar, executive leaders from ISO, PCI and the I.I.I. discuss how the insurance industry performed in 2016, and explore some key challenges and opportunities facing insurers in the years to come.
By now you’ll have read the headlines that the U.S. property/casualty (P/C) insurance industry’s $42.6 billion profit for the full year 2016 was 25 percent lower than its $56.8 billion profit for 2015.
Putting some context around the numbers is important.
—Despite the challenge of ongoing low interest rates, weak domestic and global economic growth and rising claims, the industry nevertheless posted a modest 2.7 percent net written premium growth (compared to 3.5 percent in 2015).
—Overall industry capacity (policyholder surplus) rose to $700.9 billion (up 4.0 percent) as of December 31, 2016. This is a new peak for industry surplus.
As I.I.I. chief economist Dr. Steven Weisbart notes:
News headlines about the failure of long-term care insurer Penn Treaty American Corp. of Allentown, Pennsylvania, underscore that while failures of U.S. insurers are rare, they are possible.
The New York Times reports that the order from state authorities calling for the liquidation of the medium-sized insurer and the closure of its operations leaves tens of thousands of Penn Treaty policyholders in limbo.
The good news is that a safety net exists to protect policyholders.
For decades, life/health (including long-term care) and annuity policyholders, as well as property/casualty insurance customers have been protected against the insolvency of an insurance company through what is known as a guaranty fund system.
A survey of more than 1,400 risk professionals at large organizations in the U.S. or Canada that have purchased a commercial insurance policy from one of the profiled insurers or brokers throws up some interesting results.
It finds that as rates across the U.S. commercial property/casualty insurance market continue to decline, the key variables in driving overall commercial insurance customer satisfaction are insurer profitability and broker expertise.
The J.D. Power study, conducted in conjunction with RIMS (the risk management society), found a distinct correlation between customer satisfaction and insurer profitability, as measured by total commercial combined financial ratios.
Among large commercial insurers, the highest performing companies in overall satisfaction—XL Catlin (773 on a 1,000-point scale); CNA (767); and Chubb (765)—are also found to have some of the strongest combined ratios in the industry.
This suggests that the most profitable insurers are able to support more flexible underwriting standards to meet customer needs more effectively, according to J.D. Power.
The study found an overall correlation between customer satisfaction and insurer profitability of 0.67, suggesting the more profitable the book of business an insurer has, the greater the likelihood the insurer will also have high levels of satisfaction.
Among commercial insurance brokers, the most significant single attribute driving that performance is quality of advice/guidance provided, with the highest-performing firms, Lockton (863) and Arthur J. Gallagher & Co. (823), outperforming larger rivals by a large margin.
This demonstrates that brokers with in-depth expertise and who have a hands-on, consultative relationship with their clients are consistently driving the highest levels of customer satisfaction, J.D. Power says.
The inverse also appears to be true, as the study shows customer satisfaction declines by an average of 136 points among the 20 percent of customers who indicate their broker does not completely understand their business needs.
Industry-wide, brokers received an average rating of 8.34 on a 10-point scale for the quality of advice/guidance provided metric.
In addition to quality of advice/guidance, satisfaction with brokers was based on the following attributes: reasonableness of fees; ease of the renewal process; effectiveness of risk control services; variety of program offerings; effectiveness of program review; price, given services received; billing and payment process; and claims process.
Satisfaction with commercial insurers is based on five factors: service interaction; program offerings; price; billing process; and claims.
The property/casualty insurance industry is, and will remain, extremely well capitalized and financially prepared to pay very large scale losses in 2016 and beyond, according to Insurance Information Institute (I.I.I.) president Dr. Robert Hartwig and chief economist Dr. Steven Weisbart.
In their commentary on the industry’s 2015 year end results, Drs. Hartwig and Weisbart note that overall industry capacity remains near an all-time record high.
Other takeaways of the industry’s 2015 year end results: moderate profits in 2015, as measured by a return on average surplus of 8.4 percent, virtually the same as in 2014; modest premium growth (net written premiums in 2015 crossed the half-trillion-dollar mark to $514.0 billion, although the rate of increase slipped slightly to 3.4 percent growth from 4.2 percent in 2014); and a below-100 combined ratio for the fourth straight year (97.8 in 2015, compared with 97.0 in 2014).
The industry results were released by ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI).