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.
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.
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.”
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.
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.
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.
Monday, May 8, 2017
President, ISO Solutions
SVP, Policy Development & Research, Property Casualty Insurers Association of America
CEO, Insurance Information Institute
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.
I.I.I. commentary: “U.S. economic activity slowed somewhat in 2016 compared to 2015 — real GDP rose by 1.6 percent in 2016 vs. 2.6 percent in 2015—and the P/C insurance industry’s results followed suit.”
Two other key takeaways:
—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:
The industry results were released by ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI).