They all agreed. None of them could have predicted the turbulence of 2020, with its extensive wildfire damage, record tornado activity, civil unrest, COVID-19 pandemic, Atlantic storms named into the Greek alphabet with 12 making landfall, economic shutdowns, excessive rainfall triggered floods and mudslides and threats to the certainty and sanctity of the insurance contract. Still, four top executives of trade organizations took a stab at predicting what is coming for the insurance industry in 2021.
The four met virtually to lead off the Insurance Information Institute’s annual Joint Industry Forum in a panel moderated by Sean Kevelighan, CEO of Triple I. The panel was titled as a question, Trade Winds Navigation: More Rough Waters or Smooth Sailing Ahead?
Panelists included Frank Nutter, president, Reinsurance Association of America; David Sampson, president and CEO, American Property Casualty Insurance Association; Charles “Chuck” Chamness, president and CEO of the National Association of Mutual Insurance Companies, and Peter Miller, president, The Institutes, which recently became an affiliate organization of Triple I. Both associations, said Kevelighan, share the mission of being dedicated to information and education in risk management and insurance.
Seeds for what the panel predicted have mostly already been sown, as the industry anticipates even greater impacts from social inflation stemming from a tough litigation environment, political and legal challenges to the insurance contract, manmade and natural catastrophes, political antagonism to risk-based pricing and regulatory oversight of insurers’ use of available data. Federal tax policy and regulatory contagion also cause concern for 2021 and beyond.
Plaintiff attorneys have made careers of testing the wording of insurance contracts. “Lawsuit abuse clearly is still a number one priority for carriers,” said Sampson. Kevelighan said that trial lawyers “dusted off their old playbooks to sell their clients false hope, to convince them that litigation was a route to their financial relief,” in the wake of business closures from pandemic restrictions.
Kevelighan said the industry responded to this litigation threat last year with several representatives of Triple I and trade associations appearing in the media and before state and federal lawmakers to make it clear that pandemics are not insurable events and that the vast majority of business interruption policies were not written in a manner that provides coverage.
The industry association leaders fought off state legislative challenges to the insurance contract where lawmakers attempted to provide business interruption coverage retroactively to those who were not so insured by the business interruption contract language in their insurance policies. “Some voices in state legislatures were seriously calling for retroactive rewriting of insurance contracts,” said Kevelighan.
“We faced what was really an existential threat with business interruption challenges in more than 20 jurisdictions,” said Sampson. Challenges to workers’ compensation presumptions also persisted, he added. Trial lawyers took the retroactive looks off the table, said Kevelighan; still, challenges lie ahead. Now out of the mainstream news, said Kevelighan, there is much ahead in the form of litigation on this matter as cases make their way through courts. Kevelighan recommended that insurers visit the Triple I sponsored website FAIRINSURE.org for ongoing news about court activity on COVID-19 litigation.
With the shift in Washington from a Republican to Democratic administration and Congress, there is a sweeping concern with climate change. Nutter observed that climate change has been made a highest priority for the government and the economy.
Nutter called climate change a two-edged sword for the insurance industry. While extraordinary natural catastrophes threaten the financial strength of insurers, the political emphasis on the impact of climate change also creates opportunities for forward looking insurers who see those opportunities.
The combined focus by President Biden and the Democratic Congress is on a number of initiatives, said Nutter. “I would hope that insurers and reinsurers will step up to provide financing and financial support for new technologies and infrastructure initiatives. .Clearly, our industry has been dealing with consequences of climate change for a long time,” said Nutter. “The future is a different future than what we have seen in the past,” he added.
There are companies that are stressed with financial risk because of climate risk, said Nutter. Regulators will be taking a closer look at how climate may affect insurers’ financial stability. Nutter predicted that regulators will require insurers to provide more financial analysis and reporting due to these risks.
Sampson said that APCIA has adopted some principles related to climate change and environmental practices; still, he sees the Federal Insurance Office and multiple state insurance regulators issuing data calls that center on climate risks. Sampson, however, sees an even more intrusive political pressure already happening. Six members of the U.S. Senate sent a demand letter to major insurers on Dec. 23, commanding them not to provide insurance products for or invest in companies involved in resource extraction in the Arctic Circle. While there is no legal authority for such a demand, said Sampson, the letter insisted on a response from CEOs by New Year’s Eve. “That is just an example of the kinds of efforts we will see this year,” Sampson warned.
Another pressure going forward, said Sampson, is the politically-charged challenge to risk-based pricing. Chamness said there is a current challenge in Washington state renewing interest among lawmakers to ban the use of credit scores in rating for risk. Insurance Commissioner Mike Kreidler’s proposal to the legislature would ban insurers’ use of credit scores when pricing personal lines insurance. Testimony on SB 5010 was heard in legislative committee in mid-January; no action was taken at that time. The U.S. House Financial Services Committee also served as a forum on risk-based pricing last March when it heard testimony regarding a proposed federal law to prevent credit score discrimination in auto insurance.
In late January, NAMIC released an academic study/white paper by Robert W. Klein to its members. Klein holds a doctorate in economics and makes the case, said Chamness, that risk-based pricing is good for all consumers and should be allowed in the insurance industry. This study joins previous ones, said Chamness, which have shown the value of risk-based pricing.
The industry should also prepare for consumer and regulatory activism on the insurance industry’s use of data and artificial intelligence, despite Miller’s contention that insurers would become better positioned to improve their own sense of risk and to help improve customers’ outcomes. “This is exciting,” said Miller, “because it will enable the industry to make people’s lives better and safer.”
Miller sees the insurance industry’s use of innovation and advanced technology as the means to model various risks that people face in their everyday lives. Policyholders don’t want to experience a loss, Miller contended. They will see value when their insurer “can tell them how to avoid the risk in the first place.” Miller sees this mission as one that will attract the next generation to insurance careers. We need to attract people who can implement appropriate mitigation techniques, he said.
Despite its benefits, the use of advancing technology by insurers may be held back by regulators, Miller said, unless the regulator can understand how insurers go from input to output. Insurers must be able to explain the validity to a regulator, he cautioned. Miller suggested that the industry “sharpen its arguments and be really clear to the regulator.”
Without naming the company, Nutter said that a major company that was heavily invested in a multiyear AI project suffered so much pushback from a regulator that it abandoned the project. In the regulator’s view, the underlying analysis and outcome created a discriminatory product.
Sampson also foresees regulatory impediments to AI innovation, but he believes insurers can and will work to achieve acceptance of advanced technology. He said, “There are so-called consumer activists who are aggressively working against implementation of technology throughout the insurance business process. We as an industry have to acknowledge that there are very honest questions, misperceptions and mistrust of technology in society. .We have to do a much better job of listening and being self-critical and asking a lot of tough questions about artificial intelligence and algorithms.” He said APCIA plans to bring the topic to an executive roundtable in February.
States regulate and tax insurance, Kevelighan said. Still, federal policymakers hold influence over tax and regulatory trends. Chamness said tax policy is going to be a big issue. The new administration comes in with a Congress that will be receptive to finding ways to pay for big new expenses, he said. The Democrats have already scrutinized the 2017 tax reforms, said Chamness.
“Put an exclamation point on that,” said Sampson. “Clearly, elections have consequences. .What we have seen is nothing less than a tectonic shift in power structures in DC, and that is going to have profound implications for policy initiatives,” he said. Not only does Sampson expect that tax code changes could affect insurers, he sees federal financial services regulatory reforms as taking in the insurance industry. Sampson said that the incoming Secretary of the Treasury Janet Yellen stated last July that there is a need for a new Dodd-Frank Act that will take in previously federally unregulated entities, what she termed shadow banking. Prevailing wisdom, said Sampson, is that the term includes the insurance industry. The demand letter sent on Dec. 23 to insurers may foreshadow what is coming.
Even without a new Dodd-Frank Act, Nutter sees more of what he termed regulatory contagion on the horizon. When the SEC adopts policies, state insurance regulators have to look at them. Even though the Federal Insurance Office has no regulatory authority, Nutter expects it to engage studies on new policies and financial issues.