Category Archives: Insurers and the Economy

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.

The challenge of population projections: future strain on Medicare and Social Security may be even greater than Census figures would suggest

By Steven Weisbart, Chief Economist, Insurance Information Institute

A few days ago, the Census Bureau made news based on its latest projection of the population of the United States over the next 40 years. One observation that the Bureau made was that the number of people over age 65 would soon outstrip the number under age 18—the first time that has happened in our history.

But one sharp-eyed economist/demographer quickly questioned the underlying projections, at least for the near term. Tom Lawler noted that one of the assumptions in the Census Bureau projections is expected deaths by age group which, for seven 10-year age groups from 15 to 85, were far below recent data published by the National Center for Health Statistics (NCHS). For example, in the 35-44 age group, the Census Bureau projection for the July 1, 2016-June 30, 2017 year was for 62,599 deaths, whereas for the 2016 calendar year the NCHS reported 77,792 deaths.

The Census Bureau was also off in the other direction, according to Lawler’s citing of the NCHS data, in over-projecting deaths for the under-1-year age group (39,741 for the Census Bureau, 23,161 for NCHS) and for the 85-and-over age group (909,723 for the Census Bureau, 854,462 for NCHS).

There are several reasons why getting the level and trend of population projections right is important. From any business viewpoint (including insurance), the number and life-stage of customers, as well as potential workers, can have a significant effect on plans for growth. More specifically, using the NCHS numbers implies a smaller “prime working age” population (ages 25-54) than the Census Bureau projects, coupled with a larger 85-and-older population—suggesting greater strain on Social Security and Medicare than would otherwise be expected.

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.

The Insurance Industry’s Value Added to GDP

By Dr. Steven Weisbart, chief economist, I.I.I.

How significant a role does the insurance industry play in the U.S. economy? There are many ways to quantify the answer to this question, and even then the answers do not capture all of the valuable ways insurance contributes to economic growth. Still, it might be instructive to consider briefly one indicator.

The U.S. Commerce Department’s Bureau of Economic Analysis calculates and reports quarterly industry-by-industry contribution to the U.S. $19.25 trillion GDP. In the latest report, for the second quarter of 2017, the insurance industry’s value added contribution was $596.5 billion (seasonally-adjusted at an annual rate). This is 3.5 percent higher than for the same quarter in 2016.

The nearly $600 billion value-added puts the insurance industry ahead of both the information industry (if broadcasting and telecommunications are excluded) at roughly $500 billion, and the transportation industry, at roughly $525 billion. Within the broad field of financial services, the value added by “Federal Reserve banks, credit intermediation, and related activities” was $543.6 billion.

It might be surprising that the insurance industry’s contribution to the GDP exceeds that of banks, but this has been true every quarter since the fourth quarter of 2014—11 quarters and counting. So, relative to banks, the insurance industry’s contribution to the economy has been growing faster.

The historical record for the past five and a half years, expressed as value added as a percent of GDP for banks and insurance is shown in the accompanying graph.

Swiss Re forecasts growth in insurance markets

This in from Swiss Re Institute’s Global Insurance Review 2017 and Outlook 2018/2019 report:

The cyclical upswing in the global economy is set to continue in 2018 and 2019, supporting insurance premium volume growth.

Global non-life premiums are forecast to grow by at least 3 percent annually in real terms in the next two years and life premiums by 4 percent.

Emerging markets, particularly in Asia, will remain the driver of global non-life and life premium growth, according to Swiss Re.

THE WEEK IN A MINUTE, 11/16/17

The III’s Michael Barry briefs our membership every week on key insurance related stories. Here are some highlights:

The U.S. House of Representatives approved on Tuesday, November 14, the 21st Century Flood Reform Act. It calls for a five-year extension of FEMA’s National Flood Insurance Program (NFIP).  The NFIP is due to expire on Friday, December 8, 2017.

Hurricane Irma has to date generated an estimated $5.87 billion in insured claim payouts in Florida, according to the state’s Office of Insurance Regulation (OIR).

The American Heart Association’s new blood-pressure guidelines could impact how life insurers underwrite their policies, the I.I.I.’s chief economist, Dr. Steven Weisbart, told PolicyGenius.com.

 

Insurance makes it to the Double Jeopardy round

Some of you may have been delighted when insurance appeared as a category in a recent Jeopardy show. On Thursday, November 9th the Double Jeopardy round featured a category called “satisfying all your insurance needs.”

The contestants were able to answer most of the questions, but no one could identify a completion bond or term life insurance. For a full list of questions and answers click here.

Counter-terrorism efforts key to estimating risk post-9/11

Today marks the 16-year anniversary of 9/11, and as we remember those who perished and honor first responders on that day, it’s worth noting that we have not had a large-scale terrorist attack on U.S. soil since then.

From a recent discussion by property underwriters Gedion Amesias and Jeri Xu at the Swiss Re Open Minds blog:

“Since 9/11, the U.S. government and four of its allies (Five Eyes alliance) have been spending tens of billions of dollars each year on counter-terrorism. Even though it’s hard to accurately estimate, there are experts that approximate the U.S. spends around $100 billion a year on counter-terrorism efforts. Successful attacks since 9/11 have been carried out by either a lone wolf or a duo, for example the 2016 cargo truck attack in Nice by one driver, and 2013 Boston Marathon bombing by a pair of brothers. Plots that involve more people are more likely to be discovered through the surveillance of their communications, so organized large-scale plots are less likely to occur.”

And:

“Terrorism insurance is effectively insurance against the failure of counter-terrorism. Because counter-terrorism efforts have increased so much post 9/11, a reasonable assumption to make is that the frequency and severity of loss from terrorism have decreased significantly.”

They conclude that underwriters need to think about how terrorists will behave going forward and how governments around the world will counteract terrorism in order to predict where and to what extent future losses may occur.

Willis Towers Watson offers insight into how insurers are responding to meet the evolving nature of terrorism.

The I.I.I. has resources on terrorism risk and insurance here.

Texas braces for Hurricane Harvey

As Texas prepares for the imminent arrival of intensifying Hurricane Harvey, already a Category 2 storm, latest analysis shows the enormous potential values at stake.

Just in from CoreLogic: More than 200,000 homes in Texas have the potential for storm surge damage with an estimated total reconstruction cost value (RCV) of almost $40 billion.

Houston, Texas ranks number 7 among the top 15 metropolitan areas for storm surge risk, with a potential 283,380 at-risk homes and an RCV of $53.4 billion.

But don’t forget the potential impact of strong hurricane-force winds.

Earlier from AIR Worldwide: The insured value of residential and commercial properties in coastal areas of Texas totaled $1.2 trillion in 2012, accounting for 26 percent of the state’s total insured property exposure.

The Texas Windstorm Insurance Association (TWIA), is the state’s insurer of last resort for wind and hail coverage for Texas Gulf Coast residential and commercial property owners in the event of catastrophic loss. TWIA covers wind and hail in 14 coastal counties and parts of Harris County. TWIA has initiated its catastrophe plan.

Insurers stand ready to assist all policyholders impacted by Harvey.