Social Inflation
and COVID-19

Social inflation” refers to rising litigation costs and their impact on insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage. While there’s no universally agreed-upon definition, frequently mentioned aspects of social inflation are growing awards from sympathetic juries and a trend called “litigation funding”, in which investors pay plaintiffs to sue large companies – often insurers – in return for a share in the settlement.

If the idea of social inflation was controversial before the start of the coronavirus pandemic and subsequent economic lockdown, with some calling it a hoax, the subject must now be looked at through the additional lens of COVID-19’s long-term impact on liability questions, plaintiff expectations, and juror attitudes.

A.M. Best said early in the crisis that COVID-19 could produce a big increase in social inflation. The reason: expectations that businesses would sue their insurers in an attempt to access their business interruption coverage for losses relating to the coronavirus pandemic. Such lawsuits have been and continue to be brought.

Hiscox warns about rising Florida risk

Despite reports of rate increases across the property catastrophe reinsurance sector at the mid-year renewals, a Hiscox executive has warned that these improvements could be offset by rising costs of risk in Florida, Reinsurance News reported

After consecutive heavy loss years, some fairly significant loss creep and low interest rates, coupled with the impacts of the COVID-19 pandemic, reinsurance rates reportedly trended in a positive manner at the mid-year renewals, with rises of 20% – 30%, or more in some instances. While reinsurers will welcome rate increases after a prolonged soft market and subsequent pressured returns, the improvements might not be sufficient to account for the increased risk in the region’s market, according to Ross Nottingham, Chair of North America at Hiscox Re and ILS, a division of global insurer and reinsurer Hiscox.

“Why? Because these increases haven’t yet covered our own view of the increased risk in the Florida market, which suggests that the amount of risk going into these programmes is a lot higher than thought last year,” Nottingham said. “That means you might get a 30 percent increase on the programme, but if you’ve measured the risk to the layer and established that it’s potentially worth 40 percent more in premium than it was last year, the margin has in fact decreased.”

Nottingham said the increases being seen in the Florida market in 2020, while positive, are barely covering the additional risk that is out there as evidenced by the substantial levels of adverse loss development on prior year events.

“And what’s continuing to drive loss creep? The villain of the piece is social inflation – a factor not yet captured in the vendor cat models the industry benchmarks for measuring hurricane risk.”

Nottingham says that in Florida social inflation comes from a variety of sources, ranging from assignment of benefits (AOB) litigation to loss adjustment inflation.

AOB abuse has been mitigated somewhat by recent reform legislation. But Nottingham says this reform is expected to have a limited impact on catastrophic claims being litigated and related inflation of a claim once lawyers start to get involved through other avenues.

“Despite insurers’ best efforts to change their original policy forms or to de-risk in the worst performing areas, it is expected that AOB or equivalent abuse will continue after the next big loss event,” says Nottingham. “Two years ago, the market thought the physical attributes of Irma were akin to a one in 10-year event. The loss now – with the advent of social inflation-fueled loss creep – looks more like the cost of a one in 20-year event, but there is no new science to show the expected vulnerability or hazard has changed.”

Another important element impacting reinsurance rates this year is the ongoing COVID-19 pandemic, which, Nottingham says hasn’t been factored into pricing for the months ahead. Forecasters predict an above-average level of hurricane activity in the Atlantic in 2020, which, coupled with the unprecedented impacts of the virus outbreak, presents unique challenges for the industry.

How Court Lockdowns May Turn Social Inflation Tide

COVID-19 may affect some aspects of social inflation in a different manner, Claims Journal reports.

Speaking at a recent Advisen event – Social Inflation: Truth or Fiction – defense attorney Ellen Greiper reported receiving more than the usual number of phone calls from plaintiffs’ attorneys.

“I have had a flurry of phone calls from plaintiffs who are now willing to take that [settlement] amount I had offered before,” said Greiper, a partner with Lewis Brisbois, Brisgaard & Smith. With courts having been closed as part of the general pandemic lockdown and now slowly reopening, “Those plaintiffs are realizing that they are not going to get a trial for at least two years, no matter what status their case may be and whether it’s discovery or past that. So now they are coming out of the woodwork.”

She added that the plaintiffs are “starting to realize that when we all come back and the jurors don’t have jobs or they’ve been furloughed, they’re not getting $10 million on a cervical fusion. They may realize that’s a ridiculous amount of money.”

Latest report shows job stability for the insurance industry

By Dr. Steven Weisbart, Chief Economist, Insurance Information Institute

Dr. Steven Weisbart

The employment report for June 2020 just released by the U.S. Bureau of Labor Statistics, has some interesting numbers.  I’m not referring to the national employment numbers but to the May employment numbers for the insurance industry.

You might remember that the May numbers for the national economy were dreadful. The unemployment percentage was 13.3 percent. The comparable numbers for subsets like the property/casualty (P/C) insurance industry aren’t released until a month later, but those numbers for these subsectors became available today. Note that the May numbers are preliminary and are often revised, though slightly, in subsequent months.

In May, preliminary P/C insurance carrier employment shed the 2,700 jobs that had been gained in April. P/C carrier employment has been effectively flat at 559,000 since February 2020—remarkable in relation to most other sectors of the economy.

Life/annuity carriers gained 300 jobs in May, for total employment of 350,000—essentially flat since January 2019 (with some few large month-to-month changes that net to roughly zero).

Surprisingly, health (mainly medical expense) carriers lost 3,200 jobs in May, following a loss of 2,500 (revised upward) jobs in April. This might be explained by the cessation of services like elective surgery and fewer visits to emergency departments (a recent CDC report showed a drop of roughly 25 percent in visits for heart attacks and strokes in April and May).

Insurance brokerage and agencies gained 1,500 jobs in May after having lost 10,500 jobs (revised) in April. I suspect that the May agent/brokerage numbers will be revised upward next month, in part due to participation in the Paycheck Protection Program.

It looks like the insurance industry is doing its part to keep the economy running.

My floodiversary

Getty Images

Today marks one year when my car got flooded, I got stranded, and I learned a huge lesson: I call it my floodiversary.

We keep a small saltwater tank, and to keep the tank healthy, it needs regular water changes. Before the Fourth of July weekend I decided to swing by the local fish store and pick up 5 gallons of water to replenish the tank. That way I could get the chores out of the way in order to relax and enjoy the rest of the holiday weekend.

I got to the store in time and picked up a five-gallon industrial container. I put it in the back, put the hatch down and started the 30-minute trip home. About halfway there, I made a turn. That’s when the trouble started. The car began to lose power. Fortunately I was able to pull over. I tried to start the car. Nothing. A new car…why? Then it occurred to me: the %$@*& water. I went to the back, opened the hatch and sure enough, my trunk had about an inch of water gently sloshing back and forth. I started to try and scoop the water out with the bucket, but it was impossible.

I went back to the car, got in and left the door open and started to assess my options. It was sweltering–about 90 degrees; I was in the middle of nowhere and had spotty cell service. I let my family know where I was and tried to connect to my car’s emergency system. After many tries and fails, and even speaking to an engineer, it was clear the car was not going to start up again. So I waited for the tow truck and my husband, as I swatted mosquitoes and thought about cold drinks and air-conditioning.

The tow truck arrived from the dealership, but the guy was in a hurry. He refused to let me ride back with him, but it was a war of wills. I was determined not to be left on the side of the road, so I stalled by asking him questions until my husband pulled up. We both watched as the car was raised on the flatbed, with water streaming out the back. It was a holiday weekend, so the car would have to sit on the lot in the heat all weekend. My husband had brought a stack of towels, so we did what we could. We looked at each other. No more water in the car.

On the ride back home I called my insurer. They couldn’t do much over the weekend but would be back in touch after the holiday. The next week I got the call. After the deductible was met, the damage was all covered—about $4,500 all in. My insurance also covered the cost of a rental car. The adjuster assured me the car would be fine; it turns out the water had shorted out a panel located in the trunk of the car that connected to its “brain.” But after the ordeal, it was a relief to know the car would be ok and ready to drive after a few days. The adjustor had been pleasant and helpful. “I got to tell you,” he said, “I’ve seen flooding before. But I’ve never seen a car flooded from the inside.”

Don’t Get Burned by Mishandled Fireworks

As towns cancel fireworks celebrations because of the coronavirus pandemic, many more backyard and neighborhood fireworks displays will likely take place on July Fourth.

In New York City, more than 12,500 calls were made to 911 for illegal fireworks in June alone – roughly  12 times the number of comparable calls received  in the first six months of 2019.

Though fireworks are legal in some form in most states, they can be very dangerous when not handled by professionals. According to the National Fire Protection Association, fireworks caused 19,500 fires in 2018. A recent wildfire in Utah that prompted the evacuation of 100 homes was attributed to fireworks.

And nearly 4,900 Americans go to the emergency room with fireworks-related injuries during the first eight days of July, according to the Pew Research Center.  

The video above explains the insurance coverage available for fireworks-related damage or injury. For example, if a neighbor’s fireworks damage your home, their homeowners policy should cover you. But if you are setting off illegal fireworks, remember: homeowners insurance  doesn’t usually cover accidents caused by illegal actions.

For Fourth of July  safety tips, click here.

Have a safe and enjoyable holiday!

Understanding FEMA and other flood maps

On June 29 the First Street Foundation, a nonprofit research firm, released an analysis of flood risk which shows that nearly 6 million of the nation’s properties are at more substantial risk of flooding than indicated by the Federal Emergency Management Agency’s (FEMA) maps.

FEMA replied with a statement that its maps are intended for floodplain management and decisions about emergency responses and that its flood insurance risk maps do not conflict with First Street’s maps since the two complement one another by showing different types of risk.

To help explain how flood maps work, Dr. Michel Léonard, Vice President & Senior Economist, Triple-I, wrote the following post.

Flood maps are used to identify and communicate a property’s exposure to flood. 

Flood maps rank exposure from lowest to highest by categorizing an area into a set of standardized flood zones, with each zone assigned its own flood exposure level. Flood exposure is normally expressed as a percentage representing flood frequency and/or severity over a specific number of years. This approach is similar to maps for other natural perils. 

The most commonly used flood map is FEMA’s nationwide flood map. There are also several high-quality flood maps from academia, non-profits and businesses, each providing added perspectives. These maps aren’t meant to be better than one another but rather, together, to provide a fuller understanding of the risks caused by floods to homeowners, businesses, and communities.

First Street’s flood map is an example of such maps: scientific, credible, and insightful in its contribution to the discussion about current and changing flood exposure. Its main insight, that flood risk and exposure may be higher than currently implied by FEMA’s or other maps, is not a controversial statement but rather adds to the growing consensus across flood experts that flood risk is increasing in frequency and severity nationwide as a result of extreme weather events. FEMA recommends reviewing its own flood map every year due to exposure changing over time. 

The main takeaway from flood maps for consumers and businesses is learning about their own relative exposure vis-à-vis other locations. Homeowners and businesses should use flood maps to better understand their current exposure and determine, for example, whether their property insurance is adequate or considering preemptive risk mitigation. 

Homeowners and businesses thinking about moving should look at these maps before deciding about where to go. Will they be more or less exposed to flood?  How will the new location’s flood exposure impact their mortgage, their insurance costs?

That said, while all flood maps provide insight into flood exposure, FEMA’s flood map remains different from others. As a government provided flood map, it is a countrywide benchmark for flood risk identification and quantification. It is used by different levels of government, regulators, first responders and insurance companies. For example, homeowners and businesses should know that a property’s location within a specific FEMA flood map zone is the sole benchmark for mortgage lenders requiring flood insurance in order to get a mortgage. 

For more about FEMA’s flood map see: www.floodsmart.gov/flood-map-zone/about

California Reports $1.2 Billion in Premium Refunds in Response to COVID-19

Insurers refunded $1.2 billion to California policyholders as of June 26, according to actuarial firm Perr & Knight.

The California Department of Insurance (CDI) ordered the refunds to drivers and businesses in the state affected by the COVID-19 emergency. The companies were required to file reports outlining the details of their response to COVID-19.

CDI recently made these reports public, and Perr & Knight,  which specializes in rate filings, published an analysis. Here are some key takeaways:

  • California’s reports have information on the number and percentage of policyholders affected. If the state is a guide, EVERY person with a personal auto insurance policy got a break on premiums, as well as millions of other policyholders, according to James Lynch, Triple-I’s chief actuary.
  • Private auto insurance customers received the largest share of the refunds – a little over $1 billion. Commercial auto customers received about $33 million in refunds, and workers compensation customers received $82.7 million.
  • Commercial multi-peril clients received $11.2 million, commercial liability $7.2 million and medical malpractice $10.3 million.

The reports also have data on payment deferrals (grace periods), which is something that has been underrecognized, in part because it was so hard to quantify.