Category Archives: Industry Financials

Triple-I/Milliman Report: 2020 Turmoil Takes Toll on P/C Insurer Finances

The global pandemic and costly natural catastrophes will contribute to a projected 101.7 combined ratio for the U.S.’s property/casualty (P/C) insurers in 2020, higher than the 98.8 the industry posted last year, according to the latest Underwriting Projections: 2020-2022 report from Insurance Information Institute (Triple-I) and Milliman.

The combined ratio is the percentage of each premium dollar a P/C insurer spends on claims and expenses. An increase in the combined ratio means financial results are deteriorating, while a decrease means they are improving.

For 2020, insurers are projected to pay nearly $1.02 (101.7) in claims and expenses for every premium dollar they collected. In 2019, they paid about 99 cents (98.8) on every premium dollar in claims and expenses.

The latest report is somewhat rosier than prior projections. For 2020, P/C insurer annual premium growth is projected to be 1.5%, an improvement from the decline of 0.5% projected three months ago, the report noted.

“Our estimates of premium growth are tied pretty tightly to economic indicators. Estimates of 2020 nominal GDP, while still showing shrinkage, have improved. That, plus a more nuanced understanding of how insurers booked the personal auto givebacks, helped us revise our premium estimates,” said Jason B. Kurtz, FCAS, MAAA, Principal & Consulting Actuary, Milliman. 

In addition, the latest report incorporates more information as to how the industry is performing financially year-to-date. Filed first-half results provide a good idea of how premium and insured loss trends are impacting results.

“We can compare loss ratios for this year against last year and prior years and, after a couple of quarters, we can fine-tune our projection,” Kurtz said. “And we know a lot more about catastrophe losses, which are usually the biggest wildcard, and the third quarter is when the hardest catastrophes generally hit.”

For most lines of business, the forecast changed little from three months ago. Premium forecasts for lines like general liability and commercial auto insurance were affected because of the economic forecast.

“In commercial auto, for example, we thought the increase in online shopping would affect exposures more than it appears to have done. But as to the underwriting result, we didn’t change things much. Rates are higher, as we expected, and those lines are still fighting social inflation,” said James Lynch, FCAS, MAAA, Senior Vice President and Chief Actuary, Triple-I.

The report forecasts U.S. P/C insurance industry premium growth of 5 to 6 percent for 2021-22, slightly lower than the prior forecast released by Triple-I and Milliman.

What to Watch for

There’s still a lot of uncertainty when it comes to the pandemic. “The industry continues to grapple with how big the impact will be,” said Lynch. “There’s more certainty than three months ago, but that still leaves a whole lot of uncertainty,” he said. “Our stance remains where it was – the net loss impact will be the equivalent of a major hurricane – but as industry veterans know, some major hurricanes hit harder than others.”   

Also, the path the economy takes as a result of the pandemic matters, added Kurtz. “Gross domestic product (GDP) rose the fastest in U.S. history last quarter, but the resurgence of COVID cases could mean another lockdown – perhaps softer than what we saw in the spring, but any lockdown triggers a slowdown. So, we might see a double-dip recession, and that suppresses premium growth.” He noted that a K-shaped recovery would be good for some segments of the U.S. economy while not being good for others.

Another wild card: government and regulatory responses. Another Coronavirus Aid, Relief, and Economic Security (CARES) Act that puts money in the hands of individuals and businesses is likely to buoy the economy as it did in the spring, the report states. Liability protections for reopening businesses would be favorable for the industry. “Congress may deal with that in the lame duck session or next year, but we will see,” said Kurtz.

The quarterly report was presented on November 17 at an exclusive members only virtual webinar moderated by Sean Kevelighan, Chief Executive Officer, Triple-I.

“This webinar series is another example of how the Insurance Information Institute is modernizing and innovating,” Kevelighan said.  “Under the leadership of our chief actuary, James Lynch, the Triple-I is now giving its members timely, data-driven, and unique insights on insurance industry underwriting projections.”

Triple-I’s Chief Actuary: Insurers Are Navigating COVID-19’s Economic Fallout

The pandemic affected almost every link in the property/casualty value chain, but the industry weathered the stress well, according to Triple-I’s chief actuary, James Lynch.

“The U.S.’s property/casualty (P/C) insurers provided premium relief, retained employees, and weathered a capital market downturn while navigating this year’s COVID-19 pandemic,” he said at the Casualty Actuarial Society’s (CAS) virtual annual meeting on November 10.

“Private-passenger auto insurers returned around $14 billion in premiums this year to the nation’s drivers as miles driven dropped dramatically in the pandemic’s early months. This resulted in a five percent reduction in the cost of auto insurance for the typical driver in 2020 as compared to 2019. At the same time, the U.S.’s auto, home, and business insurers continued to employ two million-plus Americans as the industry responded to numerous natural disasters as well as the aftermath of civil unrest.”

This year’s record-setting hurricanes and wildfires, coupled with civil disorders in multiple states, have caused insured loss payouts totaling tens of billions of dollars. The policyholders’ surplus—the amount of money remaining after the industry’s cumulative liabilities are subtracted from its assets—stood at $826 billion as of June 30, 2020, down from a record-high $848 billion as of Dec. 31, 2019.

The economic uncertainty in the U.S.’s capital markets in 2020’s first-quarter caused unrealized capital losses (stock declines) in insurer investment portfolios, Lynch said. Insurers who have faced lawsuits related to pandemic-caused losses also have faced the financial challenges of defending themselves, he added.

“Business income (BI) insurance coverage disputes captured media attention. Yet lawmakers nationwide have to date resisted calls to rewrite these policies retroactively as insurers faced a steady stream of lawsuits over their unwillingness to pay these claims,” Lynch said, explaining how BI coverage, also known as business interruption insurance, is generally triggered only when a business incurs direct physical damage to the business’ property.

Click here to download the presentation slides.

P/C Insurers Remained Profitable In 2020’s First-Half Despite Challenges

Dr. Steven Weisbart

The U.S.’s property/casualty (P/C) insurers turned in a profitable performance in 2020’s first-half even as the industry’s net income dropped 26 percent compared to 2019’s first-half, according to Dr. Steven Weisbart, Chief Economist, Insurance Information Institute (Triple-I).

“The first half of 2020 was by most measures financially successful for insurers writing P/C insurance. Two measures of the industry’s health—revenue and capital—rose in the first half of 2020,” Dr. Weisbart observed, in a commentary he wrote following the release of a report this week by Verisk and the American Property Casualty Insurance Association (APCIA).  P/C insurers write auto, home, and business insurance coverage.

Net income after taxes for P/C insurers was $24.3 billion in the first half of 2020 whereas this same figure stood at $32.8 billion in the first half of 2019. Contributing to that drop was $1.4 billion in realized capital losses on insurer investments in 2020’s first half, a swing from $4.3 billion in realized capital gains a year earlier, Verisk and APCIA found.

The uncertainty within insurance and capital markets due to COVID-19 could be seen in a number of ways, Dr. Weisbart’s commentary noted, as catastrophe-related claim payouts grew in 2020’s first-half, U.S. auto insurers offered to their policyholders pandemic-related premium relief, and the policyholder’s surplus dropped to $772 billion at the end of 2020’s first quarter before rebounding to $826 billion at the end of 2020’s first half.  The policyholders’ surplus is the amount of money remaining after the insurance industry’s cumulative liabilities are subtracted from its assets.

Fed’s Rate Move Portends Long-Term Challenges for P/C Insurers

Dr. Steven N. Weisbart, CLU, Triple-I Senior Vice President and Chief Economist

“The FOMC’s action will likely keep longer-term rates exceptionally low for several years more.”

The Federal Open Market Committee (FOMC) of the Federal Reserve Board  recently spelled out its objectives and strategies for at least the next several years—describing a financial framework they will maintain longer than the timeframe they typically describe. The length and parameters of this framework will have significant impact on the property/casualty industry.

The FOMC says it will hold short-term interest rates near zero, likely for several years—perhaps to 2023, quite possibly longer. Insurers don’t invest much in short-term instruments – to the extent that they do, it’s to have cash available to pay claims. They primarily invest in intermediate- and longer-term bonds and similar fixed-rate interest-paying instruments that provide steady income, which, together with premiums, covers claims and operating expenses. Insurers raise and lower premiums – partly in response to changes in investment income – to sustain profitable operations.

Because yields on these investments generally track short-term rates, the FOMC’s action will likely keep longer-term rates exceptionally low for several years more.

One signpost the Fed will use to decide when to raise rates is when inflation, as measured by the Personal Consumption Expenditure (PCE) deflator, is sustained at over 2 percent such that the average inflation rate including recent years equals 2 percent. To appreciate what this means, consider Figure 1. It shows that, since 2012, the PCE deflator has been below 2% (vs. same month, prior year) most of the time. The average over this span was 1.40%. But the Fed might not go back that far to calculate its long-run average. For example, since 2017 the PCE deflator averaged 1.69%. If the deflator averages 2.4% from now through 2023, the average from 2017 through 2023 will be 2.01%.

Figure 1

Rates falling since the 1980s

Based on the FOMC’s new framework, intermediate- and longer-term interest rates will, at best, remain at their current historically depressed levels for several years. One consequence of this is that bonds insurers hold to maturity and roll over will be reinvested at lower rates than they currently yield.

Prevailing interest rates have been generally falling since the early 1980s. Figure 2 shows this decline since 2002, as proxied by the yield on constant-maturity 10-year U.S. Treasury notes (the blue line), and its effect on the portfolio yield for the P/C insurance industry over the last two decades (the gold bars).

Figure 2

P/C insurers invest mainly in bonds, but not just U.S. Treasury securities. They also invest in corporate and municipal bonds, both of which generally yield higher rates than U.S. Treasury bonds because they are riskier. Yields on corporate and municipal bonds will likely loosely track Treasury yields.

P/C insurers also receive investment income from dividends on common and preferred stock they hold. These dividends are likely to be affected by corporate profits, which might be depressed for at least as long as the current recession lasts.

A shift to shorter maturities?

How will the insurers respond to these persistent conditions? If recent behavior is any guide, they are likely to shift to shorter-maturity bonds to retain the flexibility to switch back to longer-term, higher-yielding investments when rates eventually rise again. Figure 3 shows this pattern of shortening maturities during the years since 2009 as prevailing rates fell. From 2009 to 2019, the percent of bonds with one-to-five-year maturities rose from 36% to 41%, but those with 10 or more years of maturity fell from 19% to 11%.

Figure 3

What’s notable about this strategy is that – since shorter-term bonds yield less than longer-term bonds – the shift results in an even lower portfolio yield than the industry would have achieved if maturities were unchanged over this time span. It sacrifices near-term opportunities for the flexibility to eventually seize longer-term gains.

If the insurers continue this strategy, the shift to shorter-term bonds, combined with continued low interest rates, could lead to a scenario over the next five years that looks like Figure 4, which includes 2015-2019 yields for historical context.

Figure 4

Of course, future portfolio yields might be different from this scenario. For example, insurers might realize significant capital gains or losses. The portfolio yield in 2012, for example, was nearly two percentage points above the U.S. Treasury 10-year yield that year due to realized capital gains.

On the other hand, if interest rates rise, low-yielding bonds that are available for sale would suffer unrealized capital losses, which would be a direct reduction in policyholder’s surplus.

In a typical year the industry posts capital gains of $5 billion to $10 billion, but any number outside this range would affect the portfolio yield for that year. Capital losses also could result from investments affected by bankruptcies or other business setbacks caused by the recession. Impaired bonds would have to be accounted for on the balance sheet.

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.