Among the themes running through Triple-I’s 2022 Joint Industry Forum (JIF), a dominant one was the growing importance of predicting and preventing losses, versus the property/casualty insurance industry’s traditional emphasis on transferring risk from policyholders to insurers and assessing and paying claims when they arise.
Increasing severity of weather- and climate-related events, compounded by rising numbers of people moving into the most vulnerable geographies; cyber criminals shifting their targets and evolving their strategies, often protected by nation-state hosts; and legal-system abuse, pushing up litigation costs in ways that ultimately hurt all policyholders are among the factors contributing to the need for this shift in focus.
Against this backdrop, insurers still must price coverage and appropriately reserve for these costly risks while ensuring that their business practices remain equitable and insurance is available and affordable for all who need it. This means financial and economic issues and diversity, equity, and inclusion considerations are always part of the conversation.
Predicting and preventing requires strategy, effective use of data and technology, and partnerships across diverse disciplines and stakeholder groups – along with a focus on educating consumers, policymakers, media, academia, businesses, communities, and others about the complexities of risk and risk management.
Triple-I plays this educational role every day, through its research and media outreach and support; continuous contact with its members, regulators, content partners, and data providers; and participation in and sponsorship of events like JIF.
Florida took center stage at JIF 2022, as a group of panelists discussed growing courtroom costs and the rise of legal system abuse.
“Legal system abuse is a combination of factors, including social inflation, nuclear verdicts, third party litigation funding, tort reform pullback, cost shifting schemes, and attorney advertising,” opened Ronna Ruppelt, CEO of CLM & Claims Pages, who served as moderator.
Ruppelt added, “Florida is the poster child for legal system abuse.”
The panel analyzed the general landscape of these issues, and how Florida became the epicenter of many of these issues.
They noted that in Florida, roof and windshield claims are part of this cottage industry, driven by plaintiff fee recoveries more than the subject of the litigation itself. The costs of roofs have dramatically increased even in the past three years. This is not primarily driven by disasters.
“In 2021, Florida had 116,000 property insurance lawsuits pending,” Ruppelt said. “The state is on pace for approximately 130,000 in 2022.”
Most states only have a few hundred. California, the most populous state in the U.S., had a mere 3,500 property insurance lawsuits pending in 2021.
“The numbers highlighted are staggering,” said Fred Karlinsky, shareholder and global co-chair of Greenberg Traurig, LLP. “It’s been recognized at the highest levels of state government.”
With the recent gubernatorial election in Florida, this problem has only become more visible. Incumbent Ron DeSantis and his challenger (and former governor of Florida) Charlie Crist debated over the costs of roof replacement, as well as litigation over home insurance.
“There may be a $10,000 judgement award, but millions of dollars of fees,” Karlinsky said.
Indeed, the property insurance market has become similar to health care, with assignment of benefits (AOBs)—in which an insured signs their benefits over to the medical provider—getting paid by insurers. AOBs utilize unscrupulous contractors that come in before the insurers, and “make your home a disaster zone.”
“The insurers have no way to know what the damage was, and now they have to fight these claims,” Karlinsky added, noting that once the insurer enters the court system, it often results in nuclear verdicts.
“Florida is tougher for adjusters,” mentioned Joseph Blanco, the president of Crawford & Company. “After we confirmed up for Hurricane Irma, there have been billboards all over the place saying don’t believe adjusters.”
Attacking the credibility of adjusters, Blanco said, makes it very difficult for insurers. This only adds to unrealistic expectations for claims, making it more challenging to settle pre-litigation.
Though the panel recognized this kind of legal abuse began in the 80’s and experienced upward trends in the 90’s and early 2000’s, there were calls at the time for nationwide tort reform. However, the lawyers involved in these suits have become more sophisticated, making it even more challenging to confront this issue.
“The lawyers involved identify a theory of liability, find litigation funders, create advertisements, and then they go forum shopping,” said Harold H. Kim, the president of the Institute for Legal Reform, and the chief legal officer and executive vice president of the U.S. Chamber of Commerce. “They roll the dice to see if they can achieve a settlement or a nuclear verdict, which shifts the value of negotiations.”
“It’s so pernicious that the corporate community is in the crosshairs,” Kim added. “The stability of the rule of law and the ability to operate a business is critically challenging.”
The panelists agreed that problems surrounding legal abuse are only growing more significant.
“What we have seen is the use of plaintiff attorneys are moving out of Florida to you,” Karlinsky said. “AOBs and the roof phenomena are not just going to be in the large states. We’re seeing them all over the place. The plaintiff’s bar does not have the same restrictions as the insurance industry.”
“What happens in Florida doesn’t stay in Florida,” concluded Kim.
State Farm CEO Michael Tipsord discussed a wide range of insurance industry issues and trends with Triple-I CEO Sean Kevelighan at Triple-I’s 2022 Joint Industry Forum. A unifying thread throughout their conversation was the continued relevance of State Farm’s mutual ownership structure and “captive” agent network in today’s risk and operational environment.
State Farm is unusual among large U.S. insurers in that it has retained its mutual structure and continues to rely primarily on a network of more than 19,000 captive agents to sell its products. Founded in 1922 by a farmer who believed farmers shouldn’t have to pay the same auto insurance rates as city dwellers, State Farm has grown to become the largest home and auto insurer in the United States, in terms of market share and premiums written.
The mutual structure – in which policyholders own the insurer – was popular at the time, but in recent decades many mutuals have converted to stockholder-owned companies to access capital needed to grow more quickly.
“This mutual structure permeates everything we do, every decision we make,” Tipsord said. “My focus is always on what’s in the best long-term interests of that State Farm customer group as a whole.”
Mutuality “gives us the flexibility to make choices that our publicly traded counterparts may not think they have,” he explained. “That mutual structure has to be combined with financial strength. Annual operating results are just a means to that end. We’re not subject to the same pressures” as insurers that have to answer to external shareholders.
Similarly, State Farm’s captive agent workforce – located in all but two U.S. states – “are in their communities, day in and day out. They’re in a position to understand their customers because they’re living with their customers.”
Tipsord noted that 95 percent of State Farm’s business comes through its agents, and “we are investing back” into that workforce.
When the pandemic hit and lockdowns commenced, Tipsord said, “Our agents and team members proactively reached out to their customers – not to sell anything, just to check in, to see if they were okay. To see if they needed any help. There are hundreds of stories of agents identifying elderly who needed help buying groceries. It always comes back to our mission of helping people.”
But the success of State Farm’s mutual model and captive agency force doesn’t absolve the company from the need to evolve with changing conditions. State Farm is investing heavily in “digitally enabling our agents,” Tipsord said, “and our agents and their teams readily adapt” to their customers’ expectations.
Part of that digitization effort was State Farm’s recent investment of $1.2 billion in ADT for a 15 percent stake in the home-security company.
“What was most important in that transaction was the relationship that it created among State Farm, ADT, and Google,” Tipsord said. “This is what I call the $300 million opportunity fund. Let’s dedicate resource so we can look for ways in which you bring these three organizations that have very different skill sets together to help our customers.”
Insurers are expected to post an underwriting loss in 2022, following four years of modest underwriting profits, according to a panel at the Triple-I’s Joint Industry Forum.
The panel was introduced by Paul Lavelle, head of U.S. national accounts for Zurich North America, who noted that the insurance landscape has dramatically changed over the past year.
“The biggest concerns for the world economy are rapid inflation, debt crisis, and the cost of living,” Lavelle said in his opening remarks. “I think that’s why, we as an industry, need to pull this together, and deal with all the variables.”
The panel consisted of Dr. Michel Léonard, Triple-I chief economist and data scientist; Dale Porfilio, Triple-I chief insurance officer; and Jason Kurtz, principal and consulting actuary for actuarial consultant Milliman Inc.
“Inflation overall has gone up and replacement costs have come down,” Léonard said in his initial remarks. “Growth has been challenging because of federal reserve policy that has brought the economy to a halt. Most growth has been disappearing in homeowners, a bit on the commercial real estate side, and on the auto side.”
Porfilio said the rise in loss trends across the insurance industry reveals an underwriting loss, with a projected combined ratio of approximately 105 in 2022. The combined ratio represents the difference between claims and expenses paid and premiums collected by insurers. A combined ratio below 100 represents an underwriting profit, and a ratio above 100 represents a loss.
The 2022 underwriting loss comes after a small underwriting profit from 2018 through 2021, at 99. However, underwriting results are expected to improve as the industry moves forward.
“The results don’t look like the prior years,” Porfilio said. “The core underwriting fundamentals are concerning. However, after a poor result in 2022, we do expect some improvement in 2023 and 2024.”
“In the aggregate, commercial lines are relatively outperforming personal lines,” said Kurtz. “That was the case in 2021 and we expect that to be the case in 2022 and through our forecast period of 2024.”
This includes workers compensation, which is closing in on eight years of underwriting profits, according to Kurtz.
On the personal auto line, gains from 2020 have been changed to the biggest losses in two decades.
“Personal auto is very sensitive to supply and demand,” Léonard said. “In the last 24 months, there’s been a historic swing in prices, and particularly the used auto side. It’s all about supply and demand. Those prices increased 30 to 40 percent year-over-year. Recently, though, prices have come down a bit.”
“The industry lived through high profitability in 2020 due to less drivers,” Porfilio added. “Fourteen billion was returned to customers that year.”
However, due to increased driving and reckless driving, the loss ratios have gone up.
The combined ratio in 2021 stood at 101, and in excess of 108 in 2022, according to Porfilio. Still, loss trends are expected to return to normal in 2023 and 2024.
Interest rates have also affected homeowners lines.
“The federal policies have been punishing growth,” Léonard said.
“Underlying loss pressure and Hurricane Ian have created challenging results,” Porfilio added.
However, the hard market has caused growth of 10 percent in 2022, partially due to exposure agreements, as well as rate increases.
The combined ratio for 2022 is expected to be around 115, dropping to approximately 106 in 2023, before an expected decrease to around 104 percent in 2024.
On the commercial auto side, the panelists predict an underwriting profit with a combined ratio of 99 in 2021, but there was a four-point loss in 2022. This is expected to improve in 2023, with a forecast ratio of 102, and 101 in 2024.
On the commercial property lines, the markets are facing shortages of steel, glass, and copper, according to Leonard, with labor challenges contributing to low-to-mid-double-digit percentage time increases to some tasks.
“One of the most important factors in this is labor. It’s very unlikely that labor will go back to where it was,” Léonard said. “We’ve estimated that it will take 30 percent longer for repairs, rebuild, and construction, and five percent in terms of cost.”
However, Kurtz said that the net combined ratio for commercial property markets is projected to be approximately 99.1 in 2022, a small underwriting profit in spite of losses tied to Hurricane Ian. For 2023, the combined ratio is expected to be roughly 94 and 92 in 2024.
“We are anticipating further rate increases and further premium growth,” Kurtz added.
Indeed, insurers continue to adapt to these new challenges. Although 2022 is predicted to result in small losses, the industry continues to evolve.
As Lavelle said in his introduction, “Insurance companies are no longer able just to assess the risk, collect the premium, and pay the loss. We’re being looked at to come up with answers.”
Cyber criminals continued to shift their tactics and adapt their techniques in 2022, according to experts speaking at the Triple-I Joint Industry Forum (JIF) last week.
“Ransomware as a business model” remains alive and well, said Michael Menapace, an insurance attorney with the law firm Wiggin and Dana LLP and a Triple-I Non-resident Scholar. What has changed in recent years is that “where the bad actors would encrypt your systems and extract a ransom to give you back your data, now they will exfiltrate your data and threaten to go public with it.”
The types of targets also have changed, Menapace said, with an increased focus on “softer targets – in particular, municipalities” that often don’t have the personnel or finances to maintain the same cyber hygiene as large corporate entities.
Theresa Le, Chief Claims Officer for Cowbell Cyber, concurred with Menapace’s assessment, noting an increased tendency of cyber criminals to contact organizations’ customers or leaders as “a pressure point” for the organization to pay the ransom in order to avoid reputational harm.
“Threat actors are focusing on the quality of the data that they can extract while they’re ‘in the house’,” Le said, “so it’s not just stealing Social Security numbers or other information they can sell on the Dark Web, as it was a few years ago. It’s really much more thoughtful and focused.”
Scott Shackelford, professor of Business Law and Ethics at Indiana University’s Kelley School of Business, reinforced Menapace’s and Le’s observations about the increased sophistication and adaptability of cyber criminals by talking about state-sponsored incursions.
“It’s not just the North Koreas of the world,” he said, adding that “a growing cadre of nation-states” are launching attacks “not just on large corporations but increasingly small and medium-sized businesses, even local governments.”
“We founded a cyber security clinic two years ago,” Schackelford said, “and the number one request we get from local government and small utilities has to do with insurance coverage. There’s a lot of need out there for better information.”
Shackelford emphasized the continuing evolution of the Internet of Things (IoT) as an “attack surface.” In the new pandemic-driven work-from-home environment, he said, “What counts as a covered computer device for some of these policies has led to litigation and remains a big vulnerability that we’ve only just begun to wrap our minds around.”
The conversation, moderated by Frank Tomasello, executive director for The Institutes Griffith Insurance Education Foundation, ranged across topics that included:
The importance aligning insurance pricing with the risk – and educating policyholders on how to get a better price by becoming a better risk;
How threats differ for different-sized organizations and for individuals; and
The need for better data and information sharing around cyberattacks and trends.
ByDeena Snell, Director of Research Operations & Membership, Triple-I
Insurance industry decision makers and thought leaders gathered yesterday for the day-long Triple-I Joint Industry Forum (JIF) in New York City to discuss opportunities and challenges across the insurance landscape.
“The world is getting more risky,” Triple-I CEO Sean Kevelighan said in his opening remarks, “and when the world gets more risky people want answers and solutions.”
A recurring theme throughout the event – which featured panels on climate and cyber risk; legal system abuse; diversity, equity, and inclusion; and the impact of current economic conditions on insurers and policyholders – was the importance of moving from a focus on assessing and repairing damage to one of predicting and preventing losses and promoting policyholder resilience.
Kevelighan and State Farm CEO Michael Tipsord had a one-on-one conversation about how the events of recent years – from the COVID-19 pandemic and subsequent supply-chain disruptions to international conflict and inflation levels not seen since the 1970s – have contributed to shifting customer and employee behavior and expectations.
Watch this space next week for blogs featuring the panel discussions.
Insurance industry decision makers and thought leaders gathered yesterday for the Triple-I Joint Industry Forum (JIF) in New York City to share insights on managing risk in the post-pandemic world.
The in-person, daylong program was conducted in accordance with New York City’s COVID-19 protocols. Topics ranged from climate and cyber risk and the impact of “runaway litigation” on insurer losses and policyholder premiums to the challenges and opportunities presented by “the Great Resignation” for acquiring and nurturing talent in the industry.
The panels featured speakers from across the insurance world, academia, and media. Watch this space next week for panel wrap-ups.
“Insurance is one of the industries I cover for CNBC, so I look forward to discussing the top issues of the day at one of its premier events,” Brewer said. “Given 2021’s extreme weather, high-profile cyberattacks, and economic volatility, insurance has been in the news constantly, so there are plenty of things to talk about.”
The 2021 JIF is being held at the New York Hilton Midtown. The in-person, daylong program, bringing together the most accomplished thinkers and leaders in insurance, will be conducted in accordance with New York City’s Covid-19 protocols.
“CNBC is a recognized world leader in business news and reaches millions of Americans across all of its platforms,” Kevelighan said, adding that he looks forward to “a robust discussion” with Brewer. The agenda also includes panels on insurance economics, insurer talent and recruitment initiatives, and the societal costs of runaway litigation.