California wildfires and Atlantic hurricanes: Insurers grapple with rising risk  August 28th 2023

Tropical Depression Looms in Caribbean, Florida on Alert

Meteorologists at the National Hurricane Center have raised the alert for a potential tropical depression formation in the Northwestern Caribbean Sea to 60 percent, with early projections indicating a path toward Florida’s panhandle.

In the 2 P.M. update on Thursday, the National Hurricane Center reported a "broad area of low pressure" positioned over the borders of El Salvador, Honduras, and Guatemala. The forecast predicts a northward trajectory that will take it across the easternmost tip of Mexico and into the Gulf of Mexico, where the system is expected to gain strength.

While the current probability of this low-pressure system becoming a tropical depression within the next 48 hours remains at ten percent, the chances increase significantly over the next seven days to 60 percent.

This impending weather development coincides with Florida’s ongoing disaster preparedness tax holidays, offering tax savings on essential items like batteries, ice, and portable generators.

NOAA now estimates a 60 percent likelihood of an above-average hurricane season, doubling the initial 30 percent forecast in May. Contributing factors include exceptionally warm Atlantic sea surface temperatures, the highest recorded since 1950, along with delayed El Nino-associated effects.

California wildfires and Atlantic hurricanes: Insurers grapple with rising risk

The insurance sector is under intense pressure as the severity and frequency of wildfires escalate, particularly in the state of California. Major industry players Allstate and State Farm recently decided to stop issuing new policies in California, marking a significant change in the insurance sector's approach to wildfire risk​.

State Farm attributed its decision to various factors, including inflation, a challenging reinsurance market and rapidly increasing exposure to catastrophes. Allstate explained its withdrawal in a press statement: “The cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes and higher reinsurance premiums.”

This situation mirrors a nationwide trend. As climate change intensifies, insurance companies across the country are increasing rates, reducing coverage or withdrawing entirely from regions prone to wildfires and other natural disasters. This trend is not isolated to California, as states like Florida and Louisiana have been struggling with their insurance markets in the aftermath of severe hurricane damage, and Colorado is seeing a surge in insurance premiums due to the wildfire threat​​.

A warmer, drier climate in the West over the past three decades, fueled by climate change, has increased the frequency and destruction of wildfires. California, in particular, has experienced some of the largest and most destructive fires in its history​​, and 1.2 million homes there are at extreme risk of wildfire damage. The steady increase in the number of acres burned in California each year, combined with rising repair or replacement costs for homes damaged or destroyed by fire, results in increased insurance losses​.

Marlene Dailey, RSM US financial services senior analyst and David Mamane Financial Services Senior Analyst

Best’s Special Report: Insurer Innovation Accelerated by COVID-19 Continues Post-Pandemic

As the pace of innovation accelerates within the insurance industry, the top performers in more complex lines of business may be those that overcome the innate challenges of their segment to develop new products, processes, services, and business models, according to a new AM Best special report.

“Certain lines lend themselves more readily to innovative strategies than others. Complexity influences innovation adoption. Because the auto/home and health insurance lines deal with large homogeneous risks, initiatives can be scaled and replicated relatively easily.”

While COVID-19 propelled changes in the way live and work since 2020, subsequent technological changes have continued to alter consumer behavior and transformed the insurance landscape. These trends have created challenges and opportunities for insurers, accelerating the need for innovation and rewarding the most innovative insurers. The report notes that certain lines lend themselves more readily to innovative strategies than others.

“In response to the evolving risk environment, insurers accelerated their shift to digital technology and intensified their focus on product innovation,” said Jason Hopper, associate director, industry research and analytics, AM Best. “Certain lines lend themselves more readily to innovative strategies than others. Complexity influences innovation adoption. Because the auto/home and health insurance lines deal with large homogeneous risks, initiatives can be scaled and replicated relatively easily.”

CPPA Takes Aim at Connected Cars in First-Ever Review | Akin Gump Strauss Hauer & Feld LLP - JDSupra

On July 31, 2023, the California Privacy Protection Agency (CPPA) announced an enforcement review of the data privacy practices of connected vehicle (CV) manufacturers and technologies. This marks the first time the state’s new privacy regulator has used its review power under the California Consumer Privacy Act (CCPA) since the implementing CCPA regulations began taking effect in March (see here for more details).

In his press statement announcing the review, CPPA’s Executive Director Ashkan Soltani stated that “[m]odern vehicles are effectively connected computers on wheels…able to collect a wealth of information via built-in apps, sensors, and cameras, which can monitor people both inside and near the vehicle.”

Conditions Are Challenging, Claims Are Elevated, but Reinsurers’ Profits Return: Reports

Despite extremely challenging conditions, with persistent and elevated claims activity, the global reinsurance segment returned an underwriting profit in 2022, according to an AM Best report.

“Reinsurers generally have realigned their risk profiles and are in a strong position to generate the underwriting profits that had been elusive for a number of years,” said the report titled “Global Reinsurers Face Challenges Even as Conditions Improve.”

These positive financial trends are continuing into 2023, with the four main European reinsurers, Hannover Re, Munich Re, SCOR and Swiss Re, all reporting very strong results with returns on capital significantly surpassing their cost of capital, said a separate report published by Fitch Ratings.

“Price increases above claims inflation and better terms and conditions for property & casualty (P/C) have led to better underwriting margins on average.”

AM Best noted that reinsurers’ work to realign their risk profiles “have largely transferred the burden of a heavy cat loss to primary writers.”

Profits improved significantly during the first half of 2023, “thanks to better pricing, lower claims, more favorable terms and conditions and a rise in investment yields,” said Robert Mazzuoli, director, Fitch Ratings, in the report, titled “European Reinsurers: 1H23 Results.”

A Different Kind of Hard Market

The AM Best report indicated the current market is one of the hardest in decades but is very different to previous hard cycles, which were triggered when a major catastrophic event would erode a significant amount of industry capital, leading to a rapid spike in rates.

In the current hard market, the path to adequate prices has taken longer than expected, said the report, explaining that “the last six years have seen a slow, protracted process of reinsurers realigning their risk profiles, reallocating capital, re-underwriting and repricing,” AM Best said.

More Than 20,000 Deaths Recorded on U.S. Roads in First Half of 2023

Traffic deaths in the U.S. have declined slightly through the first six months of 2023, compared to the same period in 2022, according to estimates released by the National Safety Council.

Between January 2023 and June 2023, an estimated 21,150 people died in motor vehicle crashes in the United States, down 3 percent from the first six months of last year, the agency stated.

“While there is a glimmer of hope that progress is being made, these estimates are still a stark reminder of the work that lies ahead,” said Mark Chung, executive vice president of roadway practice at the National Safety Council. “Every life lost on the road is a profound tragedy that leaves a lasting impact on families, friends and communities, and every single one of those deadly crashes was preventable. The estimates further underscore the urgent need for continued efforts to improve road safety across the nation through the implementation of the Safe System approach.”

Somewhat promising was that NSC analysis also showed the decrease in deaths occurred as mileage driven increased 2.3 percent through the first six months of 2023 compared to 2022.

With the decrease in deaths and increase in mileage, the mileage death rate decreased 5.6 percent to 1.34 per 100 million vehicle miles traveled from 1.42 in 2022, the agency noted.

As the nation looks forward to the rest of the year — considered the deadlier half of the year — the agency urged employers, policymakers, community leaders and individuals to come together -in both public and private sectors – to prioritize road safety with the goal of zero traffic fatalities in the United States.