Category Archives: Regulation

Matching Price to Peril Helps Keep Insurance Available & Affordable

Setting insurance prices based on the risk being assumed seems a straightforward concept. If insurers had to come up with a single price for coverage without considering specific risk factors – including likelihood of having to submit a claim – insurance would be inordinately expensive for everyone, with the lowest-risk policyholders subsidizing the riskiest.

Risk-based pricing allows insurers to offer the lowest possible premiums to policyholders with the most favorable risk factors, enabling them to underwrite a wider range of coverages, thus improving both availability and affordability of protection.

Complications arise when actuarially sound rating factors intersect with other attributes in ways that can be perceived as unfairly discriminatory. For example, concerns have been raised about the use of credit-based insurance scores, geography, home ownership, and motor vehicle records in setting home and car insurance premium rates. Critics say this can lead to “proxy discrimination,” with people of color in urban neighborhoods sometimes charged more than their suburban neighbors for the same coverage. Concerns also have been expressed about using gender as a rating factor.

Triple-I has published a new Issues Brief that concisely explains how risk-based pricing works, the predictive value of rating factors, and their importance in keeping insurance affordable while enabling insurers to maintain the funds needed to keep their promises to policyholders. Integral to fair pricing and reserving are the teams of actuaries and data scientists who insurers hire to quantify and differentiate among a range of risk variables while avoiding unfair discrimination.

“There is no place in today’s insurance market for unfair discrimination,” the brief says. “In addition to being illegal, discrimination based on any factor that doesn’t directly affect the insured risk would be bad business in today’s diverse society.”

Learn More:

Bringing Clarity to Concerns About Race in Insurance Pricing

Delaware Legislature Adjourns Without Action on Banning Gender as Auto Insurance Factor

Triple-I: Rating-Factor Variety Drives Accuracy of Auto Insurance Ratings

Auto Insurance Rating Factors Explained

Delaware Legislature Adjourns Without Action on Banning Gender
as Auto Insurance Factor

Delaware’s state Legislature adjourned for the year without the House taking action on Senate Bill (SB) 231, which called for prohibiting the use of gender as a rating factor in personal automobile insurance policies.

The measure was based on research conducted with the Consumer Federation of America that contended many insured Delaware women are charged more than men, even when all other factors are the same. If signed into law, it would have required Delaware’s auto insurers to revisit how they price their personal automobile insurance policies for all drivers. Six states – California, Hawaii, Massachusetts, Michigan, North Carolina, and Pennsylvania – already have similar laws in place.

“The Delaware state Legislature and the Department of Insurance have the right and responsibility to govern and regulate how insurance companies conduct business within the State of Delaware,” Triple-I Chief Insurance Officer Dale Porfilio wrote in response to SB 231, which was approved by the Delaware Senate in April 2022. However, in his letter to Delaware Insurance Commissioner Trinidad Navarro, he raised several concerns with the underlying research, including:

Website Quotes vs. Issued Policies. While the Internet and electronic processing of quotes have dramatically improved the speed and accuracy of quotes, Porfilio wrote, “Many details can change for the portion of quotes which ultimately become issued policies, causing quotes to not be 100 percent accurate for issued premiums.”

Single Hypothetical Insured vs. Range of Actual Insureds. The report studied hypothetical 35-year-old drivers, then drew a conclusion about the full breadth of female and male drivers in the state of Delaware.

Aggregation across Zip Codes. Pricing methodologies are refined to very specific territorial definitions, which vary by insurer, and the report does not describe how the sample was aggregated across Zip Codes.

Porfilio explained that a consequence of enacting S.B. 231 would be a redistribution of who pays how much premium, with most of the premium increases paid by female policyholders (notably at younger ages), and a majority of the premium decreases received by male policyholders.

Critics of U.S. auto insurer pricing practices have expressed concerns that certain rating factors discriminate against certain groups. Triple-I has explained in multiple contexts how U.S. auto insurers use a wide variety of rating factors to accurately price policies.  These factors must conform to the laws and regulations of the state in which the auto insurance policies are sold,  and eliminating any one could force less-risky policyholders to overpay and allow those with greater risk to pay less than they should.

Learn more about auto insurance pricing

Triple-I: Rating-Factor Variety Drives Accuracy of Auto Insurance Pricing

Why Personal Auto Insurance Rates Are Likely to Keep Rising

IRC Releases State-by-State Auto Insurance Affordability Rankings

Triple-I Responds to SEC’s Proposed Climate-Risk Disclosure Requirements

Creating a new layer of federal oversight would neither enhance nor standardize the climate-related disclosures U.S. insurers make to investors, Triple-I said in a letter to the U.S. Securities and Exchange Commission (SEC).

Triple-I’s letter responded to the SEC’s request for public comment on its proposed rulemaking, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”

“The U.S. property and casualty industry supports and can play a constructive role in advancing transparency around weather- and climate-related risks,” Triple-I CEO Sean Kevelighan and Chief Insurance Officer Dale Porfilio wrote. “Indeed, as financial first responders, insurers have a strong ethical and financial interest in facilitating the transition to a lower-carbon economy and in promoting resilience during that transition.”

But adding a new layer of federal oversight to the existing regulatory structure would complicate insurer operations “while providing little to no benefit toward reducing greenhouse gas emissions and adapting to near-term conditions and perils,” the letter said.

The U.S. insurance industry is regulated in more than 50 jurisdictions, receiving more governance and regulatory oversight than any other type of financial service. More than 80 percent of insurers’ investments are in fixed-income – mostly municipal – securities.

“The SEC’s effort overlaps significantly with those of other entities,” Kevelighan and Porfilio wrote, mentioning the National Association of Insurance Commissioners (NAIC) and the states that regulate insurance, as well as the Treasury Department’s Federal Insurance Office (FIO). “Assessing Scope 3 emissions would be particularly onerous for insurers due to the fact that they cover diverse personal and commercial assets and activities, over which they have no control – further, there is currently no accepted methodology for insurers to measure their underwriting-related Scope 3 emissions, which makes the SEC’s proposed requirement premature for our industry.”

Scope 3 emissions are the result of activities from assets neither owned nor controlled by the reporting organization, according to the U.S. Environmental Protection Agency (EPA).

Triple-I recommended that the NAIC climate risk disclosure survey serve as the primary reporting regime for all insurers, allowing for consistent enforcement across ownership structures (public, private, and mutual) while avoiding unnecessary complexity and expenses.

“Property and casualty insurers are no strangers to climate and extreme-weather risk. We may not always have talked about the issue in those terms, but our industry has long had a financial stake in the issue. Consider the fact that insured losses caused by natural disasters have grown by nearly 700 percent since the 1980s and that four of the five costliest natural disasters in U.S. history occurred over the past decade.The industry is committed to disclosure of climate-related exposures, as such information will be integral to insurers’ ability to accurately and reliably underwrite such risks and make better-informed investment decisions,” Kevelighan and Porfilio wrote.

Learn More:

Report: Policyholders See Climate as a ‘Primary Concern’

Climate Risk Is Not a New Priority for Insurers

A Push for Better Building Codes as Catastrophe Losses Mount

Widening and Deepening the Conversation on Climate Risk and Resilience

A Piecemeal Approach Toward Transparency
In Litigation Finance

A U.S. District Court judge in Delaware made his courtroom the latest jurisdiction to require lawsuit participants to disclose whether third-party investors have any stake in litigation being brought before him.

While this is a step toward greater transparency with regard to third-party litigation funding, the standing order by Chief Judge Colm F. Connolly only affects cases in his court. The other three district court judges in Delaware have not issued similar decrees. But the order was made in an extremely influential district. More than half of publicly traded U.S. corporations are incorporated in Delaware, and the state’s laws often govern contracts between businesses.

A booming global industry

Funding of lawsuits by international hedge funds and other financial third parties – with no stake in the outcome other than a share of the settlement – has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even larger, at $39 billion globally, according to Bloomberg.

Third-party litigation funding was once widely prohibited. As bans have been eroded in recent decades, it has grown, spread, and become a contributor to “social inflation”: increased insurance payouts and loss ratios beyond what can be explained by economic inflation alone.

Efforts at transparency

Some progress in toward greater transparency has been made in recent years. Last year, the U.S. District Court for the District of New Jersey amended its rules to require disclosures about third-party litigation funding in cases before the court. The Northern District of California imposed a similar rule in 2017 for class, mass, and collective actions throughout the district. Wisconsin passed a law requiring disclosure of third-party funding agreements in 2018. West Virginia followed suit in 2019.

At the federal level, the Litigation Funding Transparency Act was introduced and referred to the Senate Judiciary Committee in October 2021.

Panelists at Triple-I’s Joint Industry Forum in December 2021 agreed on the importance of requiring disclosure of litigation funding. Insurance groups and the U.S. Chamber of Commerce say litigation funding needs more rules to prevent abuses of the legal system and to protect consumers, who often pay exorbitant interest rates on money they borrow to pay legal expenses.

“By its very nature, third-party litigation financing promotes speculative litigation and increases costs for everyone,” said Stef Zielezienski, executive vice president and chief legal officer for the American Property Casualty Insurance Association in a press release about the Delaware order. “At its worst, outside investment in litigation financing dependent on a successful verdict creates incentives to prolong litigation.”

The Delaware judge’s order requires, in addition to disclosing the name and address of any third-party funder, that parties to any case before his bench must also disclose whether approval by the funder is necessary for settlement decisions and, if so, the terms and conditions relating to that approval.

While strides like this may be small, they add up in the fight to make disclosure of third-party litigation financing a priority in states and in courthouses nationwide.

Learn More:

Social Inflation: What It Is and Why It Matters

Triple-I, CAS Quantify Social Inflation’s Impact on Commercial Auto

What Is Social Inflation and What Can Insurers Do About It?

IRC Study: Social Inflation Is Real, and It Hurts Consumers, Businesses

Insurers, Regulators
Push Back on Changes
In S&P Rating Criteria

Insurers, regulators, and members of Congress have expressed concern about proposed changes in how Standard & Poor’s Global Ratings defines “available capital” in its rating criteria. Specifically, S&P would no longer consider certain debt to be counted as available for purposes of rating insurers’ financial strength and ability to pay claims.

“Disruptive” and an “overuse of market power” is how the Association of Bermuda Insurers and Reinsurers (ABIR) described the measure in an 18-page letter to S&P, which has requested comments by April 29 on its proposed methodology and assumptions for analyzing the risk-based capital adequacy of insurers and reinsurers.

S&P’s proposed changes, in ABIR’s view, would lead to the sudden removal of billions of dollars overnight that otherwise would be available to underwrite catastrophe risk – a sector in which average insured losses have risen nearly 700 percent since the 1980s.

“This debt is viewed as capital by the regulators,” ABIR CEO John Huff says in a news release. “If carriers are forced to restructure debt, they’ll get less favorable terms today. Any replacement debt will increase financial leverage, which is counter to the stability people seek from a rating agency.”

Members of the U.S. House of Representatives and Senate, along with the U.S. state insurance regulators, through the National Association of Insurance Commissioners, have expressed similar concerns about S&P’s proposed change in its rating criteria.

ABIR points out ambiguity in the timing of the rollout of the planned changes, saying, “Insurers and reinsurers will have no time to respond to the new debt treatment before S&P has indicated the changes will go into effect.”

“There is no glide path or grandfathering,” Huff says. “It’s just a cliff. “

Bermuda’s insurers urge the rating agency to provide a transition period for any such changes, as well as grandfathering debt that already is in place.

“If there’s a transition plan, we can work within that,” Huff says. “But having this so abrupt is quite disruptive. Standard & Poor’s should be adding stability, not causing disruption.”

Bringing Clarity
to Concerns About
Race in Insurance Pricing

There is no place for discrimination in today’s insurance marketplace. In addition to being fundamentally unfair, to discriminate on the basis of race, religion, ethnicity, sexual orientation – or any factor that doesn’t directly affect the risk being insured – would simply be bad business in today’s diverse society.

Concerns have been raised about the use of credit-based insurance scores, geography, home ownership, and motor vehicle records in setting home and car insurance premium rates. Critics say using such data can lead to “proxy discrimination,” with people of color sometimes being charged more than their neighbors for the same coverage. Insurers reply that these tools reliably predict claims and help them match premiums with risks – preventing lower-risk policyholders from subsidizing higher-risk ones.

Public confusion around insurance rating is understandable. The models used to determine insurance rates are complex, and actuaries have to distinguish causal relationships from superficial correlations to appropriately align insurers’ prices with the risks they’re covering. If they get it wrong, the insurers’ ability to keep their promises to pay policyholder claims could be compromised.

And they have to do this while complying with regulations and statutes in 50-plus U.S. jurisdictions. As one of the most heavily regulated industries in the world, insurers have strong incentives to comply with anti-discrimination rules.

To help clarify this complexity, Triple-I has published an Issues Brief on the subject, and the Casualty Actuarial Society has published a series of four research papers, drilling down deep into the topic:

Defining Discrimination in Insurance

Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance

Understanding Potential Influences of Racial Bias on P&C Insurance: Four Rating Factors Explored

Approaches to Address Racial Bias in Financial Services: Lessons for the Insurance Industry

“Insurance pricing is a high-wire act,” CAS says.  “As regulation and society’s understanding of discrimination evolve, however, it is necessary for us to keep abreast of changes in the manner in which discrimination is defined and adjudicated.”

Insurers are well aware of the history of unfair discrimination in financial services. While it would be disingenuous to suggest that all traces of bias have been wrung out of the system, the insurance industry has been responsive over the decades to concerns about fairness and equity. Insurers and actuaries are uniquely positioned to continue helping policymakers, corporate decisionmakers, and the public understand these inequities and to play a constructive role in the policy discussion.

Actuaries Tackle Race
in Insurance Pricing

The Casualty Actuarial Society (CAS) has developed a series of papers examining the issue of race and insurance pricing and seeking to contribute constructively to the policy discussion around it.

“Insurance pricing is a high-wire act,” CAS says.  Actuaries have to quantify and differentiate among a massive variety of risk variables while avoiding unfair discrimination. “As regulation and society’s understanding of discrimination evolve, however, it is necessary for us to keep abreast of changes in the manner in which discrimination is defined and adjudicated.”

The CAS research has generated four papers – two published this week, two more to be published on March 31 – that define, quantify, and propose methods for addressing unfair discrimination where it is found to exist.

Confusion around insurance rating is understandable, given the complex predictive models being used today, which can lead to inappropriate comparisons and inaccurate conclusions. Algorithms and machine learning hold great promise for helping to ensure equitable pricing. However, research has shown these tools also can amplify biases that manage to creep into their programming.

Recent Colorado legislation requires insurers to show that their use of external data and complex algorithms don’t discriminate against protected classes, as well as other state and federal efforts to address perceived bias in pricing.

The actuarial discipline and the insurance industry are well positioned to continue helping policymakers and corporate decisionmakers understand and address these inequities.

The CAS papers published this week are:

Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance

Approaches to Address Racial Bias in Financial Services: Lessons for the Insurance Industry

Triple-I: Rating-Factor Variety Drives Accuracy of Auto Insurance Pricing

Lower-risk drivers should pay less for auto insurance, and premiums have closely tracked broader U.S. economic trends for decades, Triple-I told the U.S. Treasury Department’s Federal Insurance Office (FIO) this week.

In a letter responding to a federal Request for Information, Triple-I said U.S. auto insurers accurately price their policies by using a wide variety of rating factors.  All these factors must conform to the laws and regulations of the state in which the auto insurance policies are sold.

“There is no credible evidence that insurers charge more than they should, either across the broad market or in specific subsegments, such as neighborhood, race, income, education or occupation,” the Triple-I stated. The letter also said the rating factors U.S. auto insurers use to price their policies not only serve their purpose but are constantly retested to ensure their accuracy and reliability.

“If rating factors do their job well, they make insurance relatively inexpensive for some people and quite expensive for others,” the letter said. “In both cases, the assessment is correct. Drivers who present less risk pay less for coverage.”

The response to FIO’s information request highlighted how the appropriate price for an insurance policy varies greatly from customer to customer and from state to state.  Insurance is regulated by state governments.

“Insurance companies and their actuaries have focused on finding factors that make sure every customer pays the appropriate rate,” the Triple-I said. Rates are based on historical loss experience for similar risks. Premiums constitute the price customers pay for insurance coverage. 

Critics of U.S. auto insurer pricing practices have expressed concerns that certain rating factors, such as credit-based insurance scores and the geographic location of the customer’s residence, discriminate against lower-income drivers and minority groups. Triple-I explained that eliminating any rating factor – for whatever reason – forces those with less risk to overpay for auto insurance and allows those with greater risk to pay less than they should for auto insurance.

Interventions can backfire

“Eliminating factors does not affect the truth that they reveal, and if factors reveal that costs need to be high for a customer, banning them does nothing to change the underlying costs that are the reason the rate is high,” the Triple-I stated.

Regulators occasionally intervene in the rating process to make insurance less expensive for certain groups, citing the need to make insurance “affordable.”

“These interventions, however well-intentioned, can backfire in a spectacular way,” the Triple-I letter says, “raising the overall costs and severely reducing availability, as well as impeding innovations that could address the issue.”

Real problems need real solutions

Real solutions exist to make insurance more affordable, Triple-I says: “These solutions come not from tinkering with how insurers set prices but by addressing the costs that insurance covers.”

Improving the transportation environment and addressing societal issues that often force minorities and low- and moderate-income individuals to live and drive in circumstances where auto insurance costs the most are among the solutions suggested.

Extensive Triple-I research shows that rising claims costs have been the primary factor generating increased auto insurance rates.

Learn More From the Triple-I Blog

Here’s What’s Happening to Your Auto Insurance Costs

Auto Insurance Premiums Face Downward Pressure Due to COVID-19

Nevada Class Actions Against Auto Insurers Risk Hurting Policyholders

Policyholder Dividends Soar as Auto Insurers Respond to Pandemic

Auto Insurance Rates Decline Across U.S.

Auto Damage Claims Growing Twice as Fast as Inflation: IRC Study

As Nat Cat Losses Mount,
A Resilience Mindset Matters More Than Ever

Insurance is essential for individuals, businesses, and communities to recover quickly from natural  catastrophes – but perils have evolved to a point at which risk transfer, though necessary, isn’t enough to ensure resilience.

Triple-I CEO Sean Kevelighan said during a that better insured communities recover more quickly but “the long-term resilience of both the communities impacted by natural catastrophes and of the industry itself depend on preparedness and improved risk mitigation.”  He was one of three panelists participating in the webinar.

“Something’s Got to Give”

Insured U.S. natural catastrophe losses totaled $67 billion in 2020 after an Atlantic hurricane season which included 30 named storms, record-setting wildfires in California, Colorado, and the Pacific Northwest, and a severe derecho in Iowa. This year’s hurricane season looks to be more severe; the Bootleg wildfire in Oregon – so large and intense it has begun to create its own weather and is affecting air quality as far east as New York City – isn’t  expected to be fully contained until late November; and these disasters are taking place on the heels of devastating winter storms in the first quarter.

As Kevelighan put it in his panel remarks, pointing to a 700 percent increase in insurer loss costs since the 1980s, “Something’s got to give.”

“As the country’s financial first responders,” he said, “insurers are not just responsible for providing relief to the communities affected by natural disasters, but also planning for potential catastrophes to come.”  

One of the ways insurers do this, he said, is by building the industry’s cumulative policyholders’ surplus—the amount of money remaining after insurers’ collective liabilities are subtracted from their assets. At year-end 2020, the U.S. policyholders’ surplus stood at a record-high $914.3 billion.

Mitigate and educate

The role of the insurance industry has grown beyond merely taking on risks to educating the public, regulators, and corporate decision makers on the changing nature of risk and driving a resilience mindset characterized by a focus on pre-emptive mitigation and rapid recovery. Triple-I and a host of other insurance industry organizations have played a key role in promoting public-private partnerships and using advanced data and analytics to understand and address hazards in advance.

For example, Triple-I’s online Resilience Accelerator provides access to data and risk maps that empowers the public to assess and prepare for risks specific to their own communities.

This webinar, co-presented by The Institutes’ Griffith Foundation and the Insurance Regulator Education Foundation, included panelists Hanna Grant, Head of the Secretariat, Access to Insurance Initiative; and Dr. Abhishek Varma, Associate Professor, Finance, Insurance and Law, Illinois State University. It was moderated by James Jones, Executive Director, Katie School of Insurance and Financial Services, Illinois State University.

Webinar highlights:

Triple-I CEO: Insurance Leading on Climate Risk

Triple-I CEO Sean Kevelighan recently briefed regulators on the steps U.S. insurers are taking to reduce climate-related risks as weather-related catastrophes increase in frequency and severity.

Environmental, Social, and Governance (ESG) issues are in the insurance industry’s DNA, Sean said in a panel discussion hosted by the National Association of Insurance Commissioners’ (NAIC) Climate and Resiliency Task Force.  “While ESG priorities may seem new to many industries, insurers have long been involved in understanding and addressing these and other risk factors as a fundamental part of doing business.” 

Speaking on the first day of the 2021 Atlantic hurricane season, Sean pointed out investment decisions made by leading insurers that he said will likely lead to carbon emission reductions.

“Insured losses caused by natural disasters have grown by nearly 700 percent since the 1980s, and four of the five costliest natural disasters in U.S. history have occurred over the past decade,” he said.

To illustrate the point, he showed an inflation-adjusted chart showing an annual averageof$5 billion in natural disaster-caused insured losses incurred in the 1980s. That figure jumped to an annual average of $35 billion in the 2010s, the same Triple-I analysis found. 

U.S. insurers paid out $67 billion in 2020 due to natural disasters. The insured losses emerged in part as the result of 13 hurricanes, five of the six largest wildfires in California’s history, and a derecho that caused significant damage in Iowa

Given the millions of Americans who live in harm’s way, the Triple-I launched its Resilience Accelerator initiative to help people and communities better manage risk and become more resilient, Sean said. The goal of the Triple-I’s Resilience Accelerator is to demonstrate the power of insurance as a force for resilience by telling the story of how insurance coverage helps governments, businesses and individuals recover faster and more completely after natural disasters.

“The insurance industry’s focus on resilience is starting to pay dividends as more Americans recognize the very real risks their residences face from floods, hurricanes, and other natural disasters,” Sean continued.

A Triple-I Consumer Poll released in September 2020 found 42 percent of homeowners had made improvements to protect their homes from floods and 39 percent had done the same to protect their homes from hurricanes.

Download Sean’s slides