Category Archives: Industry Financials

Triple-I Global Outlook: Continued Pressure on Investments & Premiums

The COVID-19 pandemic continues to depress economic growth around the world, with nearly every country experiencing declines in gross domestic product (GDP) – the total value of goods and services produced. GDP growth for the world’s 10 largest insurance markets is expected to decrease by 6.99 percent in 2020, compared to Triple-I’s previous estimate of a 4.9 percent decrease. 

Forward-looking growth proxies, such as interest rates, government spending, equity markets, and commodity prices, are sending mixed to negative messages about growth into 2021. 

Against this backdrop, Triple-I experts report, the global insurance industry has continued to issue new policies, service existing ones, and process and pay claims. While the final numbers on the extent of the pandemic and recession’s impact on the industry won’t be clear until 2021-2022, early indicators point to flat premium growth in 2020 globally and to significant differences in how the pandemic, monetary policy, and the recession are affecting insurers in the United States versus abroad. 

In its Global Macro and Insurance Outlook for the third quarter, published this week, Triple-I noted that global central banks kept benchmark interest rates mostly on hold in the third quarter at an average of 0.6 percent, reflecting the limits imposed by near-zero interest rates policies. 

Concerns about lower long-term interest rates are increasing as global central banks have pushed rates even lower during the pandemic, the report says. In a recent survey, about 33 percent of U.S. insurers said they assume flat long-term benchmark rates, while 50 percent reported having changed, or say they are in the process of changing, their investment strategy. These changes are likely to accelerate now that the U.S. Federal Reserve officially changed the focus of its monetary policy and central banks around the world follow.  

Interest rates matter because insurers get the bulk of their profits from investment earnings. U.S. insurers, in particular, rely on fixed-income financial instruments like corporate and government bonds.  If lower interest rates put pressure on insurers’ investment earnings, they will have to compensate by raising premiums paid by policyholders or adjusting their risk profiles to reduce claim payouts.   

“COVID-19 and lower economic activity continue to hinder premium growth in property, workers compensation, and auto,” the report says, “while a recent survey indicates that COVID-19 led to a reduction in life premium.” 

The report says it’s too early to determine whether increasing demand for warranty, indemnity, and cyber coverage and a surge of interest in captive insurers will make up for  downward pressure on premium growth across the industry. 

Triple-I Chief Economist: P/C Industry Strong, Despite Surplus Drop

Despite its largest-ever quarterly decline in policyholder surplus, the property/casualty insurance industry remained profitable in the first quarter of 2020 and remains financially strong, according to a commentary by Triple-I’s senior vice president and chief economist, Dr. Steven Weisbart.

Dr. Steven Weisbart

Policyholder surplus – the amount insurers hold in reserve to ensure that they can keep their promises to pay policyholder claims – dropped by $75.9 billion in the quarter as the stock market suffered a major downturn, according to a report by Verisk, a data and analytics provider, and the American Property Casualty Insurance Association (APCIA).

Since then, the COVID-19 pandemic has continued to affect many insurers and will likely impact underwriting results for the second quarter and the rest of the year.

“Thanks to continued premium growth and positive investment results, the industry turned in a profitable first quarter,” Weisbart says. “Most of its investment income comes from high-quality corporate and municipal bonds, which are not as volatile as investments in stock.”

The industry’s combined ratio – a widely used profitability metric – was 94.9 in the first quarter of 2020, compared with 95.6 for the same period in 2019. A lower ratio indicates better performance.

Combined ratios for insurers writing commercial lines coverage (excluding mortgage and financial guaranty) deteriorated 1.3 percentage points, to 97.7 percent. Personal lines insurers’ ratio improved 2.7 percentage points, to 92.2 percent. Insurers writing balanced books of business posted a combined ratio of 95.8, 1.3 percentage points better than in the prior year’s first quarter.

CORONAVIRUS WRAP-UP: PROPERTY AND CASUALTY (4/21/2020)

Automobile Insurance
Acting on ‘Thin’ Data, Auto Insurers Retain Flexibility With Premium Credits
Speeders Take Over Empty Roads — With Fatal Consequences
Business Interruption
Triple-I Economists: Enforced COVID-19 Business Interruption Payouts Would Damage Industry
Fight Over Pandemic Insurance Intensifies
Restaurants vs. Insurers Shapes Up as Main Event In D.C. Lobbying Fight
Cyber Risk
Hacking Against Corporations Surges as Workers Take Computers Home
Directors & Officers
D&O Insurance May Help Non-Public Companies With COVID-19 Claims
Financial Impact
Despite Recent Market Rally, Pandemic Will Continue to Hit Insurers’ Investments
COVID-19 to deter M&A activity in 2020: Conning
Kidnap & Ransom
Pandemic Exposes Organizations to Kidnap for Ransom Risk
Litigation
U.S. Businesses Bring Wave of Class Action Lawsuits Against Insurance Companies for Denial of Business Interruption Claims in Wake of COVID-19Pandemic
Hiscox Faces Legal Action From Chef Raymond Blanc: Reports
Ending Virus Shutdowns Too Soon Poses Legal Risk for Businesses
Reinsurance and Insurance-Linked Securities
Lack of Exclusions, Poor Wordings the COVID-19 BI Threats to Reinsurers & ILS
Workers Compensation
Utah Passes Bill to Provide First Responders With Comp for COVID
Comp Premiums Likely to Dip as Employment Declines: NCCI

From The Triple-I Blog:
MIXED REACTIONS TO WORKERS COMP COVID-19 EXPANSIONS

Coronavirus Wrap-up: Property and Casualty (4/9/2020)

Estate of Illinois Worker Who Died From COVID-19 Sues Walmart
Pricing Impact of COVID-19 Likely ‘Dramatic’: MarketScout
Federal and State OSHAs Overrun With COVID-19 Complaints
Insurance Companies Offering Relief During Pandemic
Options for Those Struggling to Pay Their Auto Insurance Premiums During Pandemic
Addressing Challenges of COVID-19: From Underwriting to Claims
Rise in Searches for ‘How to Set Fire’: A Sign Insurance Fraud Beckons as Economy Crashes?
Zoom Sued for Not Disclosing Privacy, Security Flaws
Sailors Cleaning Coronavirus-Stricken Carrier Lack Protective Gear
Colorado’s Marijuana Businesses Can Remain Open During Pandemic but Say They’re Still Struggling
Practical Business and Insurance Considerations for Hotels, Restaurants During COVID-19 Crisis
Is It Safe To Travel Anywhere? Your Coronavirus Questions Answered
SBA Overwhelmed with Demand. Is it Up to the Task of Responding to Coronavirus?
Driving Less During Coronavirus Outbreak? You Could Get an Auto Insurance Discount
Progressive, Travelers, USAA Latest to Offer Discounts, Other Accommodations
Insurance Industry Charitable Foundation COVID-19 Crisis: IICF Children’s Relief Fund
Museums Hope Thieves Stay Home Too
A.M. Best: Event Cancellation Insurers May Exclude Future Pandemics
U.S., Britain Warn That Hackers Increasingly Use Coronavirus Bait

JIF 2020 Insights: Insurance guaranty funds – an essential safety net you may not have heard of

By Loretta Worters, Vice President, Media Relations, Insurance Information Institute
Roger Schmelzer, president of the National Conference of Insurance Guaranty Funds (NCIGF), was on hand at the Joint Industry Forum (JIF), Thursday, January 16, to discuss the organization’s role in economic resilience, an important insurance industry theme.

“At the heart of every property and casualty insurance contract lies a promise that if misfortune occurs, insurance will step in to soften the blow by covering outstanding claims,” said Schmelzer.  “But what happens when an insurance company becomes financially troubled, fails, and is no longer able to uphold its end of the bargain?”

According to Schmelzer, that’s when the state property and casualty guaranty fund system – a system few know much about – steps in.

“Put simply, guaranty funds provide an essential safety net for policyholders, one that meets the needs of those least able to deal with losses should their insurance company fail,” he told reporters.  “Guaranty funds are part of the resilience formula in the insurance industry.”

How Is the System Funded?

The property and casualty guaranty fund system is a non-profit statutory structure funded by the proceeds of failed insurance companies and assessments on operating insurers that provides coordination to property and casualty guaranty funds in each of the 50 states and the District of Columbia. The system pays covered claims up to a state’s legally allowable limits and has safeguarded countless policyholders who might otherwise have faced financial ruin because of unpaid claims related to an insolvency.

“For nearly five decades, the guaranty fund system has paid out more than $35 billion to cover claims against about 600 insolvencies,” said Schmelzer. “Through the years, the system has successfully met every challenge that’s come its way and has been instrumental in supporting that insurance promise.”

What about life and health insurers?

A state life and health insurance guaranty fund system also exists, but it operates independently from the property and casualty system. NCIGF’s counterpart is the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), a voluntary association made up of the life and health insurance guaranty associations of all 50 states and the District of Columbia.  NOLGHA was founded in 1983 when the state guaranty associations determined that there was a need for a mechanism to help coordinate their efforts to provide protection to policyholders when a life or health insurance company insolvency affects people in many states.

 

 

Live webcast: I.I.I. CEO Sean Kevelighan talks insurance market dynamics at CAS spring meeting

Sean Kevelighan, I.I.I. CEO

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. What does it mean for insurance?

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.

Source: Wall Street Journal

What’s next?

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.

Source: Investopedia

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.

Source: Investopedia

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.

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.”

Assignment-of-benefits haunts Florida’s homeowners insurers

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.

Eye on commercial insurance prices

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.

Its most recent Commercial Lines Insurance Pricing Survey (CLIPS) shows that commercial insurance prices in the U.S. were nearly flat in the first quarter of 2017.

Price changes reported by carriers averaged less than 1 percent for the sixth consecutive quarter.

Four lines (workers compensation, commercial property, directors and officers, and surety) showed modest price decreases.

Commercial auto remains the outlier with meaningful price increases reported.