Category Archives: Market Conditions

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.

Highlights from the 2018 Society of Insurance Research Annual Conference

I recently spent two days (10/22-10/23) at the Society of Insurance Research (SIR) Annual Conference in New Orleans where a line-up of insurance executives and intelligence analysts talked about ways the insurance industry can leverage research, analytics, competitive intelligence and analysis techniques to get past the hype and develop effective strategies to move forward.

Here are just a few of the many interesting insights gathered at the extraordinarily intensive conference.

Digital Transformation

Implementing digital transformation will require an integrated approach across departments as well as a companywide culture shift. It will not work if executives are on-board but middle managers are not, said Robert Mozeika, Munich Re’s innovation executive.

Competitive intelligence

Competitive intelligence is not just about understanding what your competition is doing, but having a deep understanding ever changing market conditions, said Dr. Ben Gilad of the Academy of Competitive Intelligence. He suggested companies test strategic moves through role playing, with participants taking the parts of high-impact players.

Gilad had some advice for us information professionals as well – unless you can turn your insightful intelligence-gathering reports into action, they are useless. That’s why we need to become the trusted “sense maker” to our company’s top decision makers.

Innovation by insurance companies – customer experience

This year, SIR conducted a consumer survey on innovation by insurance companies. It found that auto and homeowners insurers were considered “pretty innovative” by 40 percent of respondents when compared with banks which were considered “pretty innovative” by 46 percent. This is a “pretty interesting” finding! When was the last time you heard about a new and exciting bank product?

Interestingly, there was a whopping 365 percent increase in the percentage of people reporting an increase in communication from P/C insurers regarding simplicity and ease of use of their products. It looks like people don’t equate improvements in ease of use and simplicity with innovation.

When asked which three things insurance customers would change through new technology or innovation, the top three were: privacy, ease and personalization in that order.

Artificial Intelligence (AI)

Reliance on AI is expected to increase in the next 20 years. How will AI change the world of insurance? According to Peter Grimm, CEO of Cipher Systems, it will involve:

  • The explosion of data from connected devices leading to new product categories, more personalized pricing and increasingly real-time service delivery.
  • Increased prevalence of physical robots (drones, self-driving cars, autonomous farming equipment) will lead to shifting risk pools, changing customer expectations and new products and channels.
  • Standardized data frameworks and formats will lead to highly connected data ecosystems between multiple private and public entities across many industries.
  • Advances in cognitive technologies (machines that mimic human learning) will enable products that re-evaluate risk in real time based on consumer behavior.

Chatbots and roboadvisors are already making roadways into the insurance industry and according to a survey by AXA; 34 percent of millennials want to interact with their insurer online only which shows that the market is prime for robo-advisor interaction.

Reading List

Here are a couple of books recommended by speakers that I can’t wait to dive into.

Geeta Wilson, vice president, consumer experience at Humana, recommends Competing Against Luck: The Story of Innovation and Customer Choice by Clayton M. Christensen. The author, a Harvard Business School professor who coined the term “disruptive innovation”, introduces the concept of “jobs to be done” theory in this book.

According to the theory, instead of asking customers what they want, companies would do better to get a deep understanding of what their customers do at the point when they require their product. Then the company needs to invent ways to help them do it easier, better and faster. Companies need to become obsessed with solving their customers’ problems or as Geeta put it, they need to “fall in love with the problem.”

Another book I look forward to reading is Professor Al Naqui’s The Beaver Bot of Yellowstone: Pure-Play Leadership for the Artificial Intelligence Revolution.  This book, targeted towards business leaders, promises to be an accessible guide through the mysterious and complicated cognitive transformation that firms are in for if they want to stay alive in the dawning age of AI.

 

The “After Glow” of Tax Reform Politics Too Good to Pass Up for Anti-Insurance Crowd

By Sean Kevelighan, CEO, ‎Insurance Information Institute

After the Tax Cut and Jobs Act of 2017 passed late last year, the Insurance Information Institute received numerous queries about the impact on property/casualty insurers. Given our mission at I.I.I. is not rooted in direct lobbying advocacy, we consciously refrained from engaging in what was sure to be (and was, in fact) a political battleground in some areas during the legislative process. That said, the industry deserves credit for coming together in many ways to ensure insurance receives fair treatment — a lesson learned from 1986 when the industry was sidelined.

While the anti-insurance crowd (most often misleading themselves as “pro consumer” groups) has been quick to add political rhetoric in the form of baseless and wildly exaggerated claims the industry will receive a “windfall” of income, the I.I.I. will, once again, adhere to facts that are based on actuarial and economic soundness.

Objectively, the I.I.I. sees the overall benefits to tax reform for the insurance industry to be well under 1 cent for every premium dollar.

How do we get that estimate?

Equity analysts at J.P. Morgan estimate tax reform would be about 5 percent of industry earnings, which seems reasonable based on what we know. In 2016 – 2017 industrywide results aren’t out yet – net income was $42.6 billion. Five percent of that would be a bit over $2 billion – more than I have in my pocket, but only about one-third of 1 percent of the $600 billion the industry wrote that year.

Here are a couple of other things to consider about insurers and taxes:

  • Insurance companies pay a wide variety of rates. They pay one rate on underwriting profits, another on dividends from preferred stock, another on bond payments and yet another on municipal bond payments which are almost, but not quite, tax-free. The headline rate fell considerably, but many of the other rates didn’t change at all.
  • Some companies may get a tax increase. Foreign-based groups that have historically ceded a portion of their U.S. business to an offshore affiliate based outside the U.S. are now subject to the Base Erosion and Anti-Abuse Tax – call it BEAT. However, the reduction in the overall tax rate may offset the other changes, depending on each company’s circumstances.

It is important to understand that insurance costs will quickly adjust to the new tax reality. Insurers in the largest lines – personal auto and homeowners – adjust their rates annually – sometimes more frequently. The rate – by law – explicitly reflects every cost an insurer incurs, including taxes. When the tax law changes, insurers build the new rate into their models.

Much like any business in America, insurance will use some of the benefits to invest — in its employees, products and services — so as to improve and grow. Given the industry is the second largest financial services contributor to our economy (2.8% of GDP), employing nearly 3 million Americans, it is critical that insurers make their own decisions.  If not, then where does the line get drawn? Next, the anti-business crowd would (or perhaps already has) call on other industries to make uneconomic pricing decisions.

Update: This blog post has been changed to clarify information regarding the BEAT tax.

Swiss Re forecasts growth in insurance markets

This in from Swiss Re Institute’s Global Insurance Review 2017 and Outlook 2018/2019 report:

The cyclical upswing in the global economy is set to continue in 2018 and 2019, supporting insurance premium volume growth.

Global non-life premiums are forecast to grow by at least 3 percent annually in real terms in the next two years and life premiums by 4 percent.

Emerging markets, particularly in Asia, will remain the driver of global non-life and life premium growth, according to Swiss Re.

The Week in a Minute, 11/9/17

The III’s Michael Barry briefs our membership every week on key insurance related stories. Here are some highlights:

The Wall Street Journal reported on Monday, November 6, on how insurance companies are increasingly using private firefighter services to help protect the homes of policyholders in areas prone to wildfires. According to the article, insurers see the service as an opportunity to provide protection beyond what most people get through publicly funded firefighting.

The American Insurance Association named as its new president John Degnan, a former New Jersey attorney general and vice chairman and chief operating officer at Chubb.

Waymo has been testing driverless minivans in Phoenix, Arizona over the past month, Waymo’s CEO announced this week.

 

Commercial insurance rates variable: IVANS Index

Nearly all major commercial insurance lines experienced premium renewal rate increases in October, according to the IVANS Index.

In its analysis, only workers’ compensation remained in negative premium renewal rate territory, IVANS said. Business Owners Policy remains as the line of business with the highest premium renewal rate change, despite continuing its downward trend.

October rate changes include:

  •     Commercial Auto: 3.10%, up from 2.55% at the end of September.
  •     BOP: 3.57%, down from 3.87% the month prior.
  •     General Liability: 1.79%, up from 1.70% at the end of June.
  •     Commercial Property: 2.83%, up from 2.40% the month prior.
  •     Umbrella: 1.34%, down from 1.45% at the end of June.
  •     Workers’ Compensation: -2.24%, down from -1.31% the month prior.

Analyzing more than 120 million data transactions, the IVANS Index measures the premium difference year over year.

The week in a minute, 10/26/17

The III’s Michael Barry briefs our membership every week on key insurance related stories. Here are some highlights:

  • Hurricane Nate caused insured wind-caused damage totaling anywhere from less than $500 million (Risk Management Solutions) to as much as $1 billion (CoreLogic). Nate made landfall as a Category 1 storm on the Louisiana-Mississippi border on the weekend of October 7-8.

 

THE WEEK IN A MINUTE, 10/19/17

The III’s Michael Barry briefs our membership every week on key insurance related stories. Here are some highlights:

The Week in a Minute, 10/13/17

The III’s Michael Barry briefs our membership every week on key insurance related stories. Here are some highlights:

The multiple wildfires raging this week in at least seven northern California counties have caused fatalities and widespread property damage.

Hurricane Nate made landfall as a Category 1 storm on the weekend of October 7-8 and generated storm surge-caused property damage and power outages in Louisiana, Mississippi, and Alabama.

The number of U.S. highway fatalities rose 5.6 percent in 2016 as compared to 2015, according to the National Highway Traffic Safety Administration (NHSTA).

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.