Unusual loss trends in 2021 called on the property & casualty insurance industry to play its role as the economy’s financial first responder. A look back at the most extreme loss patterns of 2021 sets the stage for the insurance-related issues we expect to dominate the 2022 public policy agenda. Loss experienced in 2021 boil down into two mega-trends: violently volatile weather events and shockingly large liability awards.

The magnitude of insurance losses from catastrophic weather and from gargantuan civil litigation awards is a clarion call for legislators, regulators, individuals, businesses and insurers to act to protect lives and property from avoidable loss. The loss experience of 2021 is pressuring insurers to respond in several ways. First, insurers are challenged to be creative and relevant, providing protection to individuals and businesses against risks new or larger than heretofore experienced. Second, insurers must improve in protecting their capital base against risks large enough to imperil balance sheets. To be sure, in 2021, largely as a result of Hurricane Ida, two Louisiana insurers and one Florida insurer failed, and a dozen more Florida insurers are on the Florida Office of Insurance Regulation watch list. Third, insurers must push back against tort trends contributing to outsized awards bearing no relation to damages sustained.

Wild Weather Fluctuations

Each of 2021’s extreme weather events provided an education in disasters, either containing a new wrinkle, or shattering a prior record for heat, drought, destruction or timing. For example, prior to September 2021, most would not have believed that a hurricane (Ida) striking Louisiana could cause more deaths in New Jersey (30) than in Louisiana (26). And who could have imagined a tornado touching the ground for four hours as it traversed four states and 250 miles?

Many parts of the country experienced temperature extremes. In February, winter storm Uri was responsible for 210 fatalities in Texas, where 69 percent of Texas’ population lost power, and 49 percent lacked water. The storm caused around $100 billion in financial losses.

In early December, the temperature in Bismarck, North Dakota approached a balmy 60 degrees. That same city hit minus 24 on New Year’s Eve. Similarly, temperatures in Seattle and Bellingham spanned an enormous range, from a scorching near 110 degrees in June to minus 9 in December. There were wide fluctuations in precipitation as well, with regions swinging from crop-destroying bone-dry drought to violent atmospheric river precipitation.

The end of 2021 was punctuated by a Colorado wildfire in a popular suburb of Boulder County, where it destroyed close to 1,000 homes. One tragic lesson from wildfires both early and late in the year is that the traditional understanding of the “wildfire season” spanning late summer into the fall has been upended. Wildfires are happening at all points in the calendar.

Off the Charts Courtroom Awards

R Street has written extensively on the “nuclear verdicts” phenomenon, wherein juries deliver awards to plaintiffs in the tens or hundreds of million dollars. This trend has become so pronounced that three of the largest such verdicts were not even included in our study because they were so recent. In December 2021, Ramsey v Landstar Ranger Inc. et al saw a Texas jury return a verdict of $730 million to the family of a 73-year old who perished in a truck accident. In October, another Texas jury returned a verdict of $352 million in a truck accident (Cruz v. Allied Aviation Fueling). But the case that broke all records was Melissa Dzion v. AJD Business Services and Kahkashan Carrier, Inc., in which a Florida jury returned a verdict of $1 billion.

In all three of these record-breaking awards, the lion’s share was for punitive damages, intended to send a “message” to corporate defendants. The loss of life in two of these cases and the paraplegia in one are tragic, and they underscore the need for improved commercial vehicle driving safety. But a ten-figure damage award strikes one as over the top. How much is a billion dollars worth? To illustrate, in a 40-year working career, one would need to be compensated $25 million per year to reach a billion in lifetime earnings. At $125,000 per year, one would need to have an 8,000-year career to accumulate a billion in pre-retirement earnings. Looked at another way, the billion dollar Dzion case was tried in Nassau County, Florida, where 90,000 inhabitants contribute to the county’s $2.4 billion GDP. Any way you look at it, a billion dollars is a lot of money.

The Path Forward

The tally of unusual and unusually destructive natural catastrophes in 2021 featured extreme disasters that qualitatively and quantitatively diverged from past events. This means that insurers and reinsurers need to exploit data and analytics to recalibrate models based on past patterns, which no longer characterize today’s and tomorrow’s altered risk landscape. Insurers and reinsurers must also work in coalitions with legislators and regulators in states, municipalities and at the federal level to support loss mitigation initiatives. Benjamin Franklin, founder of the oldest continuously operating insurance company in the United States, famously quipped that “an ounce of prevention is worth a pound of cure.” Dollars spent on loss prevention lead to lower insurance premiums, which send a market signal encouraging such behavior. Property insurers and their customers both benefit when common sense measures such as tighter building codes, restrictions on coastal construction and forest management are pursued.

Ever-higher damage awards in civil litigation unfortunately send the wrong price signal to the market, as they encourage plaintiff attorneys, who earn 30 to 40 percent of successful awards in contingency fee arrangements, to elevate demands that reach to the sky. To stem this red tide, which leads to price inflation taxing all, advocacy at the state level must push back against abuses of the civil litigation system; such abuses only lead to business failures and rising costs passed on to the entire population.

Image credit: Jo Panuwat D

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