A trio of property/casualty carrier executives voluntarily offered their views on a growing insurance availability crisis in a state like California at an industry conference last week, pointing to regulatory disconnects and political issues as drivers.
“I have real question and reservation around whether the regulatory system is able to keep up with the pace of change,” said W. Robert Berkley, Jr., president and chief executive officer of W.R. Berkley Corp., during a panel discussion at the S&P Global Ratings 39th Annual Insurance Conference.
“The situation in California really is a prime example of that—where there’s just an economic disconnect. Practically speaking the industry is saying, ‘Here’s the economic model. This is what we need to do in order to have a viable business—where the capital is getting a return that justifies the utilization. And you have a regulatory system that is struggling with that,” he said, unprompted, to explain decisions by carriers like State Farm, Allstate and American International Group to put the brakes on writing new business in the state.
“It’s a timing issue. It’s a social issue, and dare I say it is a political issue,” Berkley continued. Ultimately, society pays the price, he said.
When Berkley made his remarks, the topic under discussion—teed up by panel moderator Larry Wilkinson, an S&P Global Ratings senior director and analytical manager—was inflation, not regulation or politics. Wilkinson had asked USAA President and CEO Wayne Peacock actions insurers are talking to stay ahead of economic and social inflation trends impacting P/C insurance loss costs.
Among the actions, Peacock said, is getting rate as fast as possible.
Related article: “CEO Viewpoints: How Carriers, Reinsurers Are Reacting to Loss Pain, Inflation“
While Peacock and Selective President and CEO John Marchioni agreed with an assessment delivered by S&P Global Ratings Chief Economist Paul Gruenwald earlier in the day, who said that various components of economic inflation rates are decelerating or stabilizing, the carrier CEOs said components that matter to insurers remain elevated and that swift capacity and price changes in low layers of property-catastrophe reinsurance programs are still putting primary carriers in a bind.
Marchioni segued from Wilkinson’s original question about personal and commercial lines carrier reactions to inflation challenges into a discussion of the impacts of reinsurance market dynamics on their businesses. (See related article, “CEO Viewpoints: How Carriers, Reinsurers Are Reacting to Loss Pain, Inflation“) Then, Peacock honed in on the impacts of a hard property-cat reinsurance market on cedents and their customers with a summary: “All of that comes back then to primary carrier, and it manifests itself here in rate or access, almost [immediately], without the ability get rate as fast as the changes that the reinsurers put in place.”
“Do you mind if we keep digressing?” Berkley asked Wilkinson, moving the conversation from reinsurance to regulation. The inability of regulators to keep up with the pace of change, “applies to a whole host of different things within the insurance space,” Berkley said zeroing in on the situation in California.
Wilkinson then asked Marchioni and Peacock to describe how the regulatory challenges influence how they run their businesses.
Marchioni said commercial insurers like Selective have an easier time than personal lines insurers. “We have a lot more tools including multiple companies that are filed and the use of individual’s schedule credit and debits. It gives us more flexibility as underwriters to make decisions on pricing and not be entirely dependent upon filed base rate changes to drive rates,” he said.
Selective’s CEO went on to support Berkley’s view that “a broken regulatory system that doesn’t allow companies to generate a reasonable margin for the capital that they’re providing” ultimately hurts customers. “I think you’ve seen countless examples of that over the last several decades. Most recently we’ve got the California example. You saw in Florida, which was largely driven by an issue with regard to the regulatory and litigation environment that had an enormous cost,” Marchioni said, taking the conversation in yet another direction to discuss the need for “meaningful tort reform.”
“That’s been going the other direction for the better part of a decade or a decade and a half,” he said, suggesting that legal reforms benefiting the plaintiffs bar have been more prevalent than those that benefit insurers and their customers. “That works its way into the costs of goods sold. And unfortunately the ultimate benefit isn’t [to] the consumer with this tort reform that runs in favor plaintiffs’ bar. The ultimate beneficiary to the plaintiffs’ bar,” he said.
He added that insurers have limited ability “to tell that story”—to explain to the cost and availability consequences to consumers. “I don’t know that we can count on the regulators to do that. But I think from a public policy perspective, we need to be able to have more of that debate, which in today’s political environment at the state level or in Washington is very hard to do,” he said.
Peacock made note of recent tort reforms benefiting the insurance industry in Florida. “We made a small down payment in the right direction,” he said. Agreeing with Marchioni that personal lines insurers like USAA have a tougher time dealing with the consequences of inflation and a hard reinsurance market, he did say that the health of personal lines carriers is better than it was 12-15 months ago. “Past history is closer to the boat,” he said, referring to the need to use past loss experience to justify rate hikes. “And I think there’s more of an understanding that inflation truly is real versus you made too much money in pandemic and therefore, we’re not going to grant you any increases,” he said, suggesting a change in the mindsets of regulators.
“But the reality [because of] the natural lag in the [ratemaking] process, and the ability to have to look backwards as to opposed to projecting forward, catching up from a rate standpoint, net net is still a very challenging game,” Peacock said.
“California is probably the biggest challenge that we’re all facing today,” he stated. Echoing Berkley, he said, “There’s certainly a political angle to this. There’s a kind of a social view in California angle to this. But what’s happening is you’re reducing capacity and availability, and that’s going to shift demand into the FAIR plan there or into the insurer last resort in those states. And ultimately, consumers at large are going to pay the freight for it, most likely more than if they let the private market work.”
On a positive note, within the last six or eight weeks, Peacock said, “I do think we’re getting a little bit of relief in California,” referring specifically to the fact that regulators are starting to have a conversation around the idea of allowing insurers to use modeling—”not just look backwards at historical 20 year climate statistics [but] to be able project forward [in this] dynamic market. ”
Turning to Florida, Peacock said, “There was a very different dysfunction there—much more around, first, the litigation risk that’s there.” Secondly, concentration risk is an issue.
Most Florida insurers “are lightly capitalized firms who rely on reinsurance, and reinsurance dries up,” he said, noting that this was a factor in more than a dozen failures or exits from the Florida market.
Long-Term Fixes
The three CEOs went on to describe longer-term fixes to problems of elevated catastrophe exposure in Florida and California that would ease the burden of insurance price hikes and decreased access to insurance for customers.
“I do think there’s an opportunity for us to start having conversations at the state level about building codes,” Marchioni said. Referring to past discussions of building codes in coastal areas, he suggested that new conversations need to take place as shifting weather patterns create new exposures, such as deep freezes moving much further into the country for much longer durations. “It was building, structures, or the types of buildings that led to a lot of the losses that we saw in the last couple of deep freezes,” he said. “From an engineering perspective, we have a lot to offer as an industry to our insureds, whether personal or commercial—in our ability to really provide the support and the guidance in terms of how they can better mitigate the risk and build more resilient communities.”
Restricting where to build is another potential fix, Peacock added. “Are we as a society, both nationally and locally going to get the discipline to do that or not?” he asked, stating that this remains an open questions and noting that without societal discipline taking hold, the trends of higher insurance rates and less and less insurance access are going to worsen. “Individual firms are going to get smarter about how much risk they’re willing to take in a particular area….The trends are there,” he said.
Noting that USAA is a member-based organization, “our whole goal is to take care of military families. So it’d be really easy to get the underwriting pen out and say no. [But] we’re working very diligently to figure out how to say yes, either through tighter underwriting terms or appropriate rates. So we don’t actually have the say no to our members,” he said.
Overall, he said, “We’re going to have to convince the regulators that our look-forward is appropriate. And I think you’re going to have to get paid for the risk if you want to continue to write this type of business.”
Berkley said that changing building codes and regulation “takes time and money—and there’s not a big appetite for that in the short run as far as society goes. The reality is that the marketplace responds… to loss activity and an economic reality. That’s just how I see things,” he said.
Pointing to the large number of people impacted by Hurricane Ian floods who did not have flood insurance, Peacock said, “you’ve already got a decision that people are making because of the cost of insurance.”
“I agree with you. It’s going take a while in terms of changing policy. And I think in the long run, we have to push for that,” he told Berkley.
“When the day’s all done, society’s going to have to make a choice one way or another: You pay me now or you pay me later….There is a cost to the exposure–to insure. And society needs to decide, are you going to try and control that cost and bring that exposure down, and that in the end will reduce your cost of insurance….Or are you not going to try to bring that exposure down and that means the exposure will be greater and you’re going to have to pay for it….
“We as a society have really struggled with that, [and] flood is an example where, essentially, our politicians have said we don’t have the stomach to force society to really grapple with that. So effectively the public sector is going to subsidize what typically would be a private activity. That’s just the reality of it,” he said.
He added, “It exists not just in flood…..We see it wind. And it’s not just wind as far as hurricane, it’s straight line wind or SCS [severe convective storm], whatever you want to label it, where it is just a challenge whether people are willing to accept the realities of what the exposure is and either pay for it or adjust it. And that costs money too.”
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