Insurance leaders agree on challenges facing the industry
The 15 largest publicly-traded property and casualty insurers and reinsurers are all facing similar challenges as the year comes to a close. According to R Street’s review of Q3 2021 earnings calls, the top three difficulties are social inflation, climate change and supply chain disruptions.
Nearly all 15 (re)insurers commented on the impact of those issues on their current and potential future financial results. A few mentioned credit-based insurance scores, infrastructure and potential changes to global tax rates as important topics. While COVID-19 and natural catastrophe losses were also discussed, the overall message was that these losses were manageable and not irreparably denting balance sheets.
Each of these issues has a public policy dimension, so it is critical for legislators, staff and regulators to understand them before any develop into full-blown crises that impact policyholders.
Below is brief summary from the R Street Institute on each issue area discussed in the earnings calls.
Social Inflation
Almost every commercial insurer offered comments on social inflation, whether in prepared remarks or in the Q&A with analysts. All insurers that write commercial liability lines of business—commercial general liability, excess casualty, commercial automobile, medical professional, directors’ & officers’ liability, employment practices liability, products liability and professional liability—are exposed to the deleterious impact of ballooning civil litigation awards.
If social inflation is not checked, insurers’ reserves could be proven inadequate. Under-reserved liability insurance business has historically been the largest cause of insurance company impairment, so insurers are justifiably wary of any external trend with the potential to challenge reserve adequacy.
Most reported securing hefty rate increases in their liability books, in line with insurance rate surveys that reported double-digit rate increases in some liability lines.
Selected excerpts from the comments include:
- “Clearly there is inflation out there. We spent years talking about social inflation. It’s still there…” R. Berkley
- “Claim counts continue to climb to previous levels, and more jury trials are being scheduled. We will remain vigilant for social inflation and work to mitigate it…” RLI
- “We increased our loss cost trends about two points over the last couple of years in classes impacted by social inflation.” CNA
- “Social inflation and outright fraud are increasing loss costs in ways that are more difficult to quantify.” RenaissanceRe
- “Most insurers recognize that the drivers of social inflation remain, including legislative and regulatory intervention, social inequality, and litigation funding, as well as new causes for actions, including scrutiny surrounding ESG practices.” Axis Capital
- “All insurance companies have some exposure to social inflation. We’ve certainly seen some aspects of it.” James River
- “I think of social inflation as being driven more by things like aggressive tactics by the plaintiffs’ bar and advertising and litigation finance and things like that.” The Travelers
Climate Change
The long string of severe natural catastrophes in 2021 (February Texas freeze; German floods; hurricanes Ida and Nicholas; tropical storms Fred and Elsa; western U.S. heatwaves; drought; and wildfires) has insurers wondering how many were driven by climate change. Several (re)insurers evidently believe climate change is to blame, as evidenced by the comments below. RenaissanceRe, in particular, noted its pursuit to understand the influence and impact of climate change through its investment in RenaissanceRe Risk Sciences.
- “…is shaping up to be another year {2021} of sizable weather-related loss events [as] kind of the new normal brought on by climate change and other societal changes.” Chubb
- “We are seeing today changes globally in the frequency and severity of the perils such as tropical storms, wildfires and floods.” Chubb
- “…there is evidence now that the amount of precipitation contained within the storms appears to be greater and that is increasing the amount of loss emanating from events.” Chubb
- “If you continue to have severe hurricanes and storms and events as a result of climate change. I mean, obviously, that’s got to be factored into what it costs to insure those locations.” RLI
- “These most recent [catastrophic] events coupled with five years of poor performance within the sector and concerns about the immediate impact of climate change have most reinsurance carriers signaling stable to reduce capacity.” Axis Capital
Supply Chain Disruption
Shortages of building materials, microchips and skilled labor have contributed to higher-than-average inflation in recent months. It is unclear whether the increase in the consumer price index (CPI) is the result of demand surge following the reopening of the economy, which suggests the inflation bump will be a temporary phenomenon, or is related to rising wages, which could make higher inflation linger. Insurers are concerned about the immediate effects of higher prices because such prices cause loss payments to increase, which in turn drive up premiums. As shown in the comments below, insurers are recognizing the impact of higher costs in their forward loss projections.
- “This quarter, we increased our loss cost trends in property lines about two points because of the supply chain shortages, which have increased the cost of material and labor and don’t look like they will revert back lower anytime soon. This change pushed up our overall P&C loss cost trends marginally, and are now above 5%.” CNA
- “…underlying results in Personal Insurance were impacted by auto frequency returning to pre-pandemic levels and elevated severity in both auto and property due to higher costs for labor, materials.” The Travelers
- “Auto severity is elevated, driven in part by the rising cost of used cars, parts and labor. These inflationary factors will continue to be an industry headwind as we expect them to persist into 2022.” The Hartford
- “But given labor costs and commodity prices and supply chain problems and scarcity of materials, we expect costs to rise, and we’re building that view into future claim payments and our pricing, which is only prudent.” Chubb
- “Price inflation also plays a role in the elevated cost of catastrophes, in part due to labor shortages, supply chain disruptions and rising commodity prices affecting building costs. So while we actively adjust our view of natural catastrophe frequency and severity for the influence of climate change, we also know that these other factors represent a substantial accelerator of loss costs.” RenaissanceRe
Credit-Based Insurance Scoring
The Travelers responded to a question on the use of credit-based insurance scores and telematics in underwriting. Both Michael Klein, President of Personal Insurance, and Alan Schnitzer, Chairman and CEO, indicated that credit-based score data are powerful variables in pricing auto insurance because they are “very predictive of claim experience, and if you remove it, then you have subsidization in your rate plan between higher risk drivers and lower risk drivers.” R Street’s research into the use of credit-based insurance scores accords with the position that such scores are valuable inputs to ratemaking—and that such use is non-discriminatory.
Infrastructure
Chubb commented that the pending infrastructure would be a boon to the insurance industry because it would generate projects that need construction insurance as well as surety bonding.
Global Taxation
RenaissanceRe and Arch Capital commented on efforts to introduce a global minimum tax in President Joe Biden’s proposed changes to taxation. Because the specific provisions have not been finalized, and details on implementation remain unclarified, the Biden tax plan will remain on the watch list, especially for global (re)insurers with an international footprint.
Conclusion
The three issues that got the most air time on the insurance industry’s Q3 earnings calls—social inflation, climate change and economic inflation—have one thing in common: they are exogenous factors, externals over which the industry has little control. The industry is not suffering from poor management of issues about which it does have control, like use of capital, reserving, or pricing. Going forward, R Street will continue to monitor these calls to highlight trend issues and overlaps between public policy solutions and the insurance sector.
