Parametric insurance appears to have received increased interest in 2020.
A recent Artemis article says growing awareness of and demand for these products seems to be driven by this year’s pandemic-related volatility as insurers and insureds “are increasingly focused on solutions that can rapidly deliver cash and enable better business continuity.”
According to the article, Aon’s Innovation and Solutions team has seen “a dramatic increase” in the number of clients seeking to understand how they might supplement or replace existing risk-transfer program with parametric structures “to potentially improve cashflow following a loss event.”
Unlike traditional indemnity insurance, parametric structures cover risks without the complications of sending adjusters to assess damage after an event. Instead of paying for damage that has occurred, it pays out if certain agreed-upon conditions are met – for example, a specific wind speed or earthquake magnitude in a particular area. If coverage is triggered, a payment is made, regardless of damage.
Speed of payment and reduced administration costs can ease the burden on both insurers and policyholders. Alone, or as part of a package including indemnity coverage, parametric insurance can provide liquidity that businesses and communities need for post-catastrophe resilience.
Aon told Artemis about a U.S.-based telecommunications company that replaced its entire traditional property indemnity insurance program with a $300 million parametric hurricane insurance solution. Artemis says such deals are increasingly coming to market, “with reports of a number of large transactions in the hundreds of millions of dollars this year, as parametric triggers are increasingly embedded within large corporate risk transfer programs.”
Nevertheless, according to one animal advocacy group, about 15,000 primates are kept as pets in the U.S., and the American Veterinary Medical Association estimates that 1 in 10 American households has an exotic pet (defined as any animal native to a foreign country).
Injuries caused by pets, if they are covered by insurance, would be covered under a comprehensive homeowners insurance policy. However it’s important to read your policy and see exactly what’s covered. If you’re not sure, speak to your insurance agent. You should expect to pay more for coverage and carry higher liability limits if you legally own exotic animals. And homeowners insurance also frequently excludes any physical damage caused by pets.
Exotic animals can require expensive veterinary treatments. While pet health insurance is becoming increasingly available and affordable, many insurers cover a restricted list of species. Pet Assure, a discount program available through some employers, is accepted for many kinds of animals.
Anticipation that a COVID-19 vaccine – combined with social distancing, mask wearing, and other protective measures – may soon lead to increased travel revives our need to think about travel insurance.
Even before COVID-19, travel insurance purchases were on the rise, but primarily for trip cancellation coverage – the very product that wound up disappointing many who had their holiday plans disrupted by the virus. Most policies exclude pandemics or fear of travel, which made them practically useless after the outbreak.
Pandemic risk wasn’t on many travelers’ radar screens before the coronavirus struck – any more than the many common illness, injuries, or causes of death that ought to have prompted them to add medical and medical evacuation to their travel coverage. A report by the U.S. Travel Insurance Association (USTIA) last year found Americans spent nearly 41 percent more on travel insurance in 2018 than in 2016. However, trip cancellation/interruption coverage accounted for nearly 90 percent of the benefits purchased. Medical and medical evacuation accounted for just over 6 percent.
People don’t want to think about illness, injury, or death when planning a pleasure trip – still less pay to mitigate an improbable (at the time) threat like a global pandemic.
Travelers who wanted to cover all their bases could have purchased cancel for any reason (CFAR) coverage, which provides some reimbursement (usually 50 to 75 percent) if you cancel, no matter what reason. Before the pandemic, CFAR would have cost 40 to 60 percent more than a standard travel insurance policy. It may be even more expensive now.
Airlines offering COVID-19 coverage
Some airlines have begun offering COVID-19 coverage. This week, Cathay Pacific announced that it is providing free coverage to all passengers.
“Customers who fly with Cathay Pacific from Dec. 7 to Feb. 28, 2021 will be covered for medical expenses related to a COVID-19 diagnosis incurred while overseas,” Insurance Journal reports. “The free cover will be automatically applied when customers book their flights.”
Air Canada recently announced that members of its Aeroplan affinity program making eligible new bookings originating in Canada will receive COVID-19 emergency medical and quarantine insurance. Emirates introduced a similar program in July that it says is free of charge and covers all passengers flying to any destination in any aircraft. The airline recently announced that it has expanded the coverage, adding new features from December 1.
It’s not surprising to see airlines incorporating a COVID-19 “value add” to help boost bookings by an anxious public, and it will be interesting to watch this new business scheme play out. But, lest eager travelers forget, more routine risks that you probably weren’t insuring against before pandemic remain.
Falls, crashes, and drownings
“Globally, an estimated 37 million unintentional falls requiring medical treatment occur each year” write researchers in the journal Injury Epidemiology, citing 2018 World Health Organization (WHO) data. And falls aren’t the most common cause of injury and death on vacation. Research indicates the top two causes of death are automobile accidents and drownings.
Out of the one billion tourists traveling globally each year, it is estimated that 30 to 50 percent are either injured or become ill while traveling abroad.
Don’t let yourself be blindsided by hazards that can be easily avoided or mitigated. Understand the risks your travel plans may entail and insure against them appropriately.
Please join the Insurance Industry Charitable Foundation (IICF) on December 9, at 6 p.m. ET, for their annual benefit event highlighting the insurance industry’s charitable work in communities and honoring the philanthropic leadership of Gallagher Global.
To view details about the virtual program click on this link. On the evening of the program, you will click on the same page to view the event.
Speakers include John K. Mara, President and CEO of the New York Giants.
It’s become commonplace to say COVID-19 has “changed everything” and that we’re now figuring out how to live within “the new normal.” But listening to five experts in yesterday’s Resilience Town Hall, I was repeatedly struck by how much 2020 – with its pandemic and record-breaking hurricanes, wildfires, and civil unrest – has uncovered holes in our “old normal” existence that have long needed fixing.
“Disasters can and will happen,” said Carlos Castillo, chief development officer at Tidal Basin Group, who previously led resilience efforts at the Federal Emergency Management Agency (FEMA). “The challenge is for people to recognize that they can happen to them and there are things they can do about them.”
Castillo spoke about FEMA’s Building Resilient Infrastructure and Communities (BRIC) program. In 2020, BRIC made $500 million available on a competitive basis for disaster mitigation programs. While that amount won’t solve the nation’s disaster worries, Castillo said, the idea was to encourage public and private entities to provide matching funds for efforts that would make a real difference.
COVID-19 has made even more federal money available to states and localities and spurred projects that might not be obviously pandemic-related at first glance. Castillo cited one state that is applying for federal funds to fix its roadways to improve access to healthcare facilities. Such improvements would benefit the state and its people not just during a pandemic but in all kinds of emergencies.
This matters because, as Castillo put it, “the pandemic has shown us the importance of our logistics systems. Suddenly, everybody’s competing for masks, gowns, gloves, and respirators. It’s a matter of life or death.”
Public-private collaboration was a prominent theme. Rich Sorkin, CEO and cofounder of data and analytics company Jupiter Intelligence, said that only three years ago resilience was “almost the exclusive province of the public sector.”
But by the start of 2020, he said, climate change and its impacts were among the top priorities identified by many commercial entities, “especially in financial services.”
COVID-19 interrupted that immediate focus.
“Executives were distracted dealing with disruptions in their own internal workflows and with changes in the economy,” Sorkin said. Nevertheless, he noted several positive developments, including BRIC and the Coalition for Climate Resilient Investment – an effort by insurers, investors, asset managers, analytics firms, and regulators to understand the return on investment in resilience and communicating it to financial markets.
Sorkin said he expects 2021 to be a “breakthrough year for the private sector from a resilience perspective.”
Richard Seline, co-founder of the Resilience Innovation Hub, reinforced Sorkin’s prediction, stating that “the private sector no longer leaves it to the government to be the driver of solutions.”
Dr. Michel Léonard, CBE, Triple-I vice president and senior economist, pointed out that the insurance industry has continued to provide coverage throughout 2020 on economically viable terms for consumers and businesses.
“One of the reasons we’ve been able to maintain this ecosystem,” he said, “has been our work with regulators and commissioners – and increasingly with consumers, to be able to drive behavioral change.”
Léonard and the other speakers discussed the complexity of bringing about such change – the role of regulations and incentives, the importance of data-driven decision making, and getting consumers to engage in the sort of cost-benefit analysis usually associated with professional risk managers.
“Whether it’s building codes or pre-emptive risk mitigation, it costs money,” Léonard said, “Whether it’s new construction or public or private, you have to have people ultimately say, ‘It’s worth the money’.”
He added that technology – such as telematics for cars and smart-home systems – is providing data that can support arguments for change.
Eleanor Kitzman, founder of Resolute Underwriters and a past insurance regulator for Texas and South Carolina, described the fragmentation and politicization that can make such change difficult.
“We’ve got a real lack of alignment – not among interests, because the interests are aligned – but of incentives,” she said. “I’m focused on windstorms at a residential level, but also on the impact it has on communities. These storms devastate communities, and some of them never come back. And it’s so avoidable.”
The average payment for auto physical damage insurance claims increased at more than double the rate of inflation from 2010 through 2018, according to a new study from the Insurance Research Council (IRC).
The study, Patterns in Auto Physical Damage Insurance Claims, found that average payments increased 3.7 percent annualized during the study period, while the overall Consumer Price Index (CPI), as well as the CPI for motor vehicle maintenance and repair, grew 1.8 percent annualized.
“Damage to vehicles accounts for a growing share of the costs of paying auto insurance claims,” said David Corum, CPCU, vice president of the IRC. “As vehicle technology continues to evolve, an understanding of the cost drivers behind auto physical damage claims will be important in addressing issues in auto insurance availability and affordability.”
Other findings from the study:
Total losses have become more common and more expensive.
Catastrophe claims accounted for about one in five dollars paid for comprehensive claims.
Deductibles and policy limits have not kept pace with the growth in payments.
Physical damage claims have become less likely to have associated injury claims.
The rate of attorney involvement is lower in physical damage claims than in auto injury claims.
For most aspects of physical damage claims, there are significant differences among states.
According to National Association of Insurance Commissioners (NAIC) data, vehicle damage claims accounted for 60 percent of incurred personal auto losses in 2016, even as the injury cost index – a measure of injury costs relative to physical damage liability claims – declined. Enhanced passenger protections have contributed to a drop in the frequency of injury claims relative to the number of accidents, underscoring an important reality: auto safety improvements are effective but add to the cost of claims, as they lead to more expensive repairs when accidents happen.
With auto claims costs greatly outpacing inflation, it’s worth noting that – as Triple-I previously reported – auto insurance premium growth has trailed CPI growth, particularly since the COVID-19 pandemic and its subsequent economic downturn has led to insurers giving back $14 billion to policyholders in the form of refunds, premium reductions, and dividends.
The study presents findings from a collection of more than 220,000 claims closed with payment under the three principal private passenger auto physical damage coverages in claim years 2010, 2014, and 2018.
For more information on the study’s methodology and findings, contact David Corum at (484) 831-9046 or by email at IRC@TheInstitutes.org.
In support of Small Business Saturday, November 28, the Insurance Information Institute spotlights Chelsea Bagel, a business that has stayed resilient during the pandemic.
Deciding on your local bagel shop is a quintessential part of becoming a New Yorker. I’ve made this city my home for the past 17 years now, and it’s the first thing I do every time I move into a new neighborhood. About four years ago, I made Midtown East, Manhattan my home, and it didn’t take long for Chelsea Bagel of Tudor City to become my go-to shop.
Chelsea Bagel of Tudor City is owned by Dimitri Mikhaylov. He opened the shop and its sister restaurant, Chelsea Bagel & Café , along with his brother in 2015. Owning his own bagel shop became a dream after Dimitri invested in another coffee shop a few years prior. Never did he imagine just five years later, the world would be in a global pandemic.
“Prior to the pandemic, we were doing fine covering expenses. We had a steady flow of regular customers and high traffic from tourists. Facing the pandemic and this tough economy has been one of our biggest challenges,” says Dimitri.
In the early days of the pandemic, Dimitri had to make some difficult decisions to keep his doors open. He made reductions in staff, changed hours of operation, and withheld his own paycheck in order to pay his employees.
“The first four weeks of the pandemic, I spent a lot of my own money to meet business expenses, and I didn’t pay myself for 10 weeks,” he says. “My wife and I also had to make the decision to postpone our home mortgage for six months in order to pay for the business.”
“During that time, I thought that my business interruption insurance would have been able to help cover our losses, but after contacting my insurer, I realized pandemics are not covered. The next step was to apply for a government PPP loan.”
The small business PPP loan allowed Dimitri both to cover his expenses and hire back some staff. Since the summer, business has picked up, and he’s slowly welcoming back his regulars. There has been a 25% increase in customers in recent months compared to the start of the pandemic where business decreased by 75%.
In addition to the PPP loan, Dimitri advises that small business owners really look at their expenses to see where they can cut off spending. At the height of the pandemic, he chose to do all the buying himself, which drastically cut down the cost of goods for his shop.
“I’m hoping that the economy returns and brings customers back,” Dimitri says. “This area [New York City] relies on tourists.”
“It crossed my mind not once but many times to give up the business during all this, but hope kept me going. I have a family to feed and my employees have families to feed.”
Drivers seem to have become more comfortable in the past year with the idea of giving up their data to help insurers more accurately price their coverage.
In May 2019, mobility data and analytics firm Arity surveyed 875 licensed drivers over the age of 18 to find out how comfortable they would be having their insurance premiums adjusted based on typical telematics variables. Between 30 and 40 percent said they would be either very or extremely comfortable sharing this data.
“This time,” Arity says, “about 50 percent of drivers were comfortable with having their insurance priced based on the number of miles they drive, where they drive, and what time of day they drive, as well as distracted driving and speeding.”
This is a year-over-year increase of more than 12%. What happened?
The answer begins with a “C” and ends with a “19.”
Telematic information was part of the reason insurers could return money quickly to their customers during the COVID-19 pandemic, and that fact seems to have brought positive attention to usage-based insurance (UBI). Telematics combines GPS with on-board diagnostics to record and map where a car is, its condition, and how fast it’s traveling. This technology is integral to UBI, in which insurers are able to adjust premiums based on driving behavior.
During the first wave of the pandemic, Arity data showed considerable changes in how and when people were driving when they began to self-quarantine in March 2020. Driving across the U.S. dropped significantly, and this data helped spark the trend of insurance carriers offering refunds to their policyholders.
“These paybacks were widely covered by the media, including Forbes, so consumers became aware of the potential savings, even if their own insurer didn’t offer a discount,” Arity reports.
“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,” says James Lynch, Triple-I’s chief actuary. “This resulted in a five percent reduction in the cost of auto insurance for the typical driver in 2020, as compared to 2019.”
The COVID-19 pandemic has disproportionately affected minority communities across the United States. A less reported but no less significant part of that story has been the disease’s impact on tribal populations.
“Native people make up only around one-tenth of New Mexico’s population but more than 55 percent of its coronavirus cases,” the center wrote back in June, when it said the Navajo infection rate was “greater than that of the worst-hit state, New York; it is even greater than that of Wuhan at the height of the outbreak in China.”
In Wyoming, American Indian/Alaskan Native (AI/AN) people are less than 3 percent of the population but make up more than one-third of the state’s cases, the center said.
Limited health services, insufficient infrastructure, and above-average rates of immunocompromising diseases all predate COVID-19 and contribute to the vulnerability of these populations. Many tribes also feel excessive pain from the pandemic-spurred economic downturn as their lifeblood enterprises in gaming and hospitality are shutttered. Casino closures in early March led to an estimated loss of more than $4.4 billion in economic activity and $997 million in lost wages, affecting 246 tribes with over 500 gaming facilities in 29 states.
The Chickasaw Nation in Oklahoma is among the entities that have filed lawsuits against insurers related to business interruption coverage claims. As hundreds of COVID-19-related lawsuits regarding business interruption coverage make their way through U.S. courts, judge after judge has found in favor of insurer defendants.
Meanwhile, Native American leaders are keeping close watch on the U.S. Supreme Court battle over whether to repeal all or parts of the Affordable Care Act – a move many say could devastate health care for AI/AN communities.
“In the context of what we’re all facing,” said Stacy Bohlen, chief executive officer of the National Indian Health Board, “this is not the time to add this extra burden and an additional crisis onto the Indian health system and onto Indian people.”
The Affordable Care Act, signed by President Obama in 2010, contains provisions specifically relevant to Native Americans, including permanent reauthorization of the Indian Health Care Improvement Act, which provides ongoing funding for Native health programs. It also expanded tribes’ authority to run their own health care programs, including behavioral health and youth suicide prevention programs.
“People talk about the Affordable Care Act like it’s all one thing,” said Sarah Somers, an attorney with the National Health Law Program, who specializes in litigation to help underserved communities access good health care. “But if you repeal it, then all of the codified statutes go away.
A political force
The number of people in the United States identifying as American Indian has climbed in recent years, with California, Arizona and Oklahoma accounting for the largest concentration of the nation’s AI/AN populations, according to a USAFacts analysis of Census Bureau data.
“The U.S. held 2.8 million people who self-identify solely as Native American in 2018, with another 2.9 million identifying as multiple races, including Native American,” according to U.S. News & World Report. “The country’s population that identifies as solely Native American expanded 13% between 2000 and 2018, while the number of individuals who identify as at least partially Native American ballooned 77%.”
In this year’s elections, Native American voters played an important role in some key battleground states, according to High Country News. In Arizona, indigenous people account for nearly 6% of the population — 424,955 people as of 2018 — and eligible voters in the Navajo Nation alone number around 67,000. Native support for Joe Biden — who has released a robust policy plan for tribal nations — may have helped him win that heavily contested state.
That the insurance industry alone can’t be expected to cover future pandemic risk seemed to be a given at yesterday’s hearings by the House Finance Subcommittee on Housing, Community Development, and Insurance.
But, as is so often the case, the devil is in the details.
The session – Insuring Against a Pandemic: Challenges and Solutions for Policyholders and Insurers – was chaired by Rep. William Lacy Clay. In his opening statement, Clay said, “It is not realistic or practical to expect the insurance industry to shoulder the astronomical cost of a global pandemic. The American Property and Casualty Insurance Association has estimated that paying all [COVID-19-related] claims, regardless of exclusions, would amount to $1 trillion per month.”
With respect to business interruption coverage claims currently being adjudicated, Clay referenced both the virus exclusions in most commercial property policies and the lack of “direct physical damage or loss” in COVID-19-related cases.
John Doyle, president and CEO of global insurance broker Marsh, testified on the importance of a public-private partnership to address pandemic risk, as well as to the need to “act now” on a solution for future pandemics.
“Acting now on a public-private pandemic risk solution will accelerate the economic recovery by reducing uncertainty,” Doyle said. “Moving forward, capital markets will seek assurances that companies have protection against prospective pandemic risk. The pace of recovery will depend upon the nature and degree of confidence in the marketplace.”
Doyle said the credit and power of the U.S. government is essential – “at the same time, I believe the insurance industry has a role to play.”
The Pandemic Risk Insurance Act (PRIA), introduced by Rep. Carolyn B. Maloney of New York, provided the jumping-off point for the testimonies and discussions of alternative proposals. PRIA, patterned after the Terrorism Risk Insurance Act (TRIA) put in place after the 9/11 terrorist attacks, was generally recognized as a good start – but several other structures were proposed to address perceived weaknesses.
One is the Business Continuity Protection Program (BCCP), advanced by the National Association of Mutual Insurance Companies (NAMIC), the American Property Casualty Insurance Association (APCIA) and the Independent Insurance Agents & Brokers of America (Big “I”).
Brian Kuhlmann, chief corporate counsel for Shelter Insurance, speaking on behalf of NAMIC and APCIA, described BCCP as a program that “would provide straightforward revenue replacement for businesses and nonprofits of all sizes” using a parametric approach that wouldn’t require claims adjustment. Unlike traditional insurance, which pays for damage if it occurs, parametric insurance automatically pays when specific conditions are met – regardless of damage incurred.
Michelle Melendez McLaughlin, chief underwriting officer for the small commercial and middle market at Chubb, presented a “bifurcated” framework that would treat small businesses differently from mid-size to large corporations.
“Pandemics affect small and large businesses differently,” she said. The Chubb framework would cover small companies for up to three months of payroll and other expenses. Policyholders would be paid a pre-determined amount when the policy is triggered. “This provides policyholders with certainty that they will receive timely financial assistance after an event.”
For businesses with more than 500 employees, the Chubb proposal would create Pan Re – a federal reinsurance facility. “Private insurance companies that choose to sell coverage would write pandemic policies at market terms and retain some portion of the risk. The rest of the risk would be reinsured through Pan Re.”
R.J. Lehmann, senior fellow at the International Center for Law and Economics, agreed with other witnesses that the insurance industry isn’t equipped to handle pandemic risk alone. He went further to question whether insurance is the best structure for addressing this problem.
“Insurance is a system of risk transfer, not a system of economic relief,” Lehmann testified. “Even if private insurers could provide this coverage—on their own or with government support—it is not clear their incentives would align with public health goals or with the aims members of Congress likely have in mind.”
The best argument for a public-private partnership, he said, is that insurers can help policyholders mitigate risks. “But it’s important to ask, ‘Mitigate the risk of what’? The risk you’re trying to reduce is the risk that a business will shut down. But, in a pandemic, you want businesses to shut down. We want them to have a safety net so they can shut down and survive.”
Hartmann counseled legislators to take their time and get the solution right, drawing from all the options that exist.
“Let’s be humble about how little we know, even about the current pandemic,” he said. “Get help to the businesses, workers, and communities who need it now. Don’t legislate for the next pandemic while we’re in the midst of the current one.”