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Year-Round Wildfires Are The ‘New Normal’: California Insurance Regulator

2018 US Property Casualty Insurance Market Report

Fintech

Fintech Funding Flows To Insurtech In February

Lemonade Growing Premiums Faster Than Esurance's Homeowners Business Did

U.S. Life & Health Insurance Market Report

Insurance
Year-Round Wildfires Are The ‘New Normal’: California Insurance Regulator

Highlights

Hailey Ross contributed to this article.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

Dec. 05 2018 — Wildfires will continue to plague the state if climate change is not brought under control.

  • Health insurance markets 'in turmoil' as a result of Trump administration actions.
  • Monitoring impact on California insurer of last resort in the wake of the latest devastating wildfires.

California Insurance Commissioner Dave Jones has less than two months before his tenure comes to a close. Jones is hopeful that the Golden State's next top insurance regulator, as yet undetermined following a tight election, will continue some of his policy initiatives, such as climate risk insurance and cannabis insurance.

S&P Global Market Intelligence caught up with Jones at the National Association of Insurance Commissioners' fall meeting in San Francisco to talk about his time in office and what's next for the state and for himself. The following is an edited transcript of that conversation.


Dave Jones, California insurance commissioner
Source: California Department of Insurance

S&P Global Market Intelligence: Is there a fear that insurers might leave California because the risk is too high or jack up the rates? What does the future landscape look like?

Dave Jones: So just to put it all in perspective, we have about 8 million single-family properties in California [and] about 3 million are in the so-called Wildland Urban Interface Counties. Those are counties which are heavily forested or have a lot of brush or grasslands. Of the 3 million ... about a million have already been rated by the insurers as "higher" or "very high" risk. For those that can't find [insurance] because the insurers have concluded their home is too risky to write, we have an insurer of last resort called the FAIR plan, which was set up by the legislature some 50 years ago to write fire insurance anywhere in California regardless of the risk.

There are roughly 38,000 FAIR plan policies in the Wildland Urban Interface versus 3 million homes in that area. So I'm watching closely the FAIR plan policy prescription levels to make sure that if we see some dramatic increase in take-up of those policies that we understand what's going on. What that would tell us if that were to happen is that people are having an even greater challenge finding admitted or surplus lines insurers. Right now there's no question that some people in some of these areas are facing a challenge.

What have you done to ensure those homeowners can overcome those challenges?

Jones: We did a wildfire insurance availability report that we released earlier this year that lays out the best available information about the acuity of that challenge. We saw a 15.3% increase in nonrenewals between 2015 and 2016 in the Wildland Urban Interface areas. That doesn't mean that 15.3% of the people living in those areas didn't get insurance; it just means they weren't renewed by their existing carrier and then had to go somewhere else. Most of them did go somewhere else and found either admitted or surplus lines insurance, but so far we've only seen an increase in the FAIR plan policies year to year of a couple thousand.

Are wildfires the new normal in California?

A firefighter battles flames along the Ronald Reagan Freeway in Simi Valley, Calif.
Source: Associated Press

Jones: It's getting worse. We're not in a crisis yet, but all of the trends are in a bad direction. And what the climate scientists tell us is that the federal government of the United States is not doing enough, fast enough, to reduce greenhouse gas emissions. And greenhouse gas emissions aren't being reduced globally fast enough. So as a consequence we're going to continue to see increases in global temperature and that means increases in temperature in California. That means reduced snow and precipitation. That means drier conditions, longer droughts, and that contributes then to wildfire, along with other impacts as well, sea level rise and hurricanes.

So what we anticipate here in California is that this is the new normal — that we no longer have a fire season, we have a year-round fire season.

I don't think there will be some tipping point, but I think things will continue to get worse. It's going to be like a frog in the pot as the temperature gets turned up and we boil. A world in which the temperature goes up an additional 3 degrees or 4 degrees Celsius is likely an uninsurable world, and ... the biggest threat that climate change [presents] to insurance markets and consumers is that at some point the risk of these catastrophes which are driven or contributed to by climate change become so severe that insurers conclude they can't afford to write insurance for it.

Now that hasn't happened yet in California, but you can see the trend moving in that direction based on what we know to be the case, which is the federal government or the Trump administration is not only not fighting climate change but it's reversed a bunch of policies of the prior administration. So the temperature is going to continue to rise and we're going to continue to see more of these catastrophic weather events and then that has an impact on pricing and availability.

You have a couple more months on the job. What's next?

Jones: I'm beginning to explore a variety of different opportunities. My hope would be that I can bring my background and experience that I have as a regulator, as a lawyer, as someone that has worked in a very complex and complicated regulatory environment, and bring that to bear in some way, shape or form. Whether that means the private sector or public sector, I think that's yet to be seen, but I'm confident there'll be plenty of opportunities out there.

What about some of your signature policy initiatives?

Jones: I think it's fairly widely known that ... the initiatives that have been important to me include our climate risk initiative, where we've done some path breaking work around getting insurers to recognize climate risk not only in their underwriting but also in their reserving. I'm the founding chair of the Sustainable Insurance Forum, which is an international working group of insurance supervisors from around the globe that is developing common supervisory approaches to dealing with climate risk. We're the first financial regulator in the United States to undertake climate risk transitions.

Switching gears to short-term plans and association health plans, are these products good for Californians and how would you hope the next commissioner regulates them?

Jones: The unfortunate efforts of the Trump administration to undermine the Affordable Care Act, simply put, are hurting Americans. We've seen now as a result of a series of actions the president has taken that it's thrown health insurance markets in turmoil, it's led to insurers raising rates, it's resulted in some insurers leaving some markets because of the uncertainty associated with actions like cutting the cost-sharing reduction payments or the introduction of short-term plans or association health plans or any of the other things the president has done or sought to do to undermine the act.

In California, notwithstanding the president's actions to undermine the ACA, we've done everything we can to defend healthcare implementation of the act because we think it's worked well for California. It's not perfect, it doesn't mean that there aren't things that ought to be change. But given the unwillingness by the Trump administration to do anything but sabotage the act, we've been trying everything we can to protect its benefits in California. That includes passing legislation which prohibits short-term plans and prohibits or places strong restrictions on the association health plans.

In one word, how would you describe your eight years at the helm of the department?

Jones: Action. When I was sworn in in 2011, in my inaugural address, I said explicitly that what I wanted to do and what I wanted to accomplish was action that would benefit consumers and make our market a better marketplace. If you look at the history of my administration, it's been an administration that's not just talk, it's not just rhetoric, it's not just policy proposals, it's taking actions time and time again to try to make sure we fulfill the mission of insurance protection for all.

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Insurance
2018 US Property Casualty Insurance Market Report

Highlights

S&P Global Market Intelligence’s 2018 US Property & Casualty Insurance Market Report offers a five-year outlook for the P&C sector, which should return to underwriting profitability for the first time since 2015.

Oct. 26 2018 — The federal tax reform President Donald Trump signed into law in December 2017 should help provide for an extended period of P&C industry profitability in 2018 and beyond as companies benefit from the lower corporate tax rate, but the impact is not limited to after-tax profitability. Actions by several prominent European-headquartered insurers to change the way certain of their U.S. business is reinsured materially impacted premium growth rates in the first quarter of 2018 and are likely to affect full-year results.

1 quarter does not a trend make

Historically strong results for the State Farm group in the first quarter
helped drive favorable comparisons in several key measures of underwriting profitability. To the extent the improvement continues for State Farm — the industry’s largest group based on direct premiums written — it could provide an additional tailwind for 2018 and beyond.

While there is a risk of recency bias in reading too much into a single quarter’s worth of data, the industry was already positioned for improved underwriting results in 2018. The second half of 2017 saw elevated catastrophe losses as the United States was hit by three landfall-making hurricanes and an unusual spate of fourth-quarter wildfires in California. Projected results for 2018 and subsequent years, all of which show combined ratios of less than 2017’s total of 103.5%, assume a normal catastrophe load.

Auto repairs in progress

Competition will remain intense in certain non-auto business lines given ample reinsurance capacity, high levels of industry capitalization and a macroeconomic environment that remains characterized by relatively slow growth in gross domestic product. Though modestly higher business volume driven by that economic expansion will help offset downward pressure on premiums, the industry will be challenged to achieve profitable top-line growth.

Trends in litigation will increasingly weigh on underwriting results in several business lines, including professional lines and the Florida homeowners business. They also could lead to greater demand for coverage, particularly for new and emerging risks.

The macro view

A rising federal funds rate and 10-year Treasury yields that have reached seven-year highs bode well for an industry that has long been suffering from low interest rates. And the relief cannot come quickly enough after the industry’s net yield on invested assets slipped to a new low of only 3.03% in 2017. Though projected results provide for increasing yields from that floor, the improvement will still take place gradually and is unlikely in and of itself to materially impact how companies are underwriting business

S&P Global Market Intelligence client? Click here to login and read the full 2018 US Property & Casualty Insurance Market Report.

The projections reflect various assumptions regarding premiums, losses and expenses. They are a product of a sum-of-the-parts analysis of individual business lines that is informed by third-party macroeconomic forecasts, historical trends and recent market observations that include first-quarter 2017 statutory results and anecdotal commentary about market conditions. Projected results are displayed on a total-filed basis and are not intended for application to individual states, regions or companies. S&P Global Market Intelligence reserves the right to update the projections at any time for any reason.

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U.S. Insurance Market Report – Property & Casualty (June 2017)

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Fintech
Fintech Funding Flows To Insurtech In February

Mar. 21 2018 — Insurance technology companies took center stage in the month of February, attracting the most investor dollars of the various financial technology subsectors that S&P Global Market Intelligence tracks. Overall funding in the financial technology sector declined about 10% from the prior month, however, based on the disclosed value of deals involving private U.S.-based companies that closed in each period.

Two health-insurance-focused startups were key drivers of the $216 million that flowed into insurtech. These were CollectiveHealth and Bind Benefits, which closed on $110 million and $60 million funding rounds, respectively. Both provide tech solutions to companies that self-insure (i.e. provide health coverage for their employees with their own money rather than using an outside insurance company.)

This was a departure from last month, when investment and capital markets technology was the most well-funded, bolstered by capital raises from several robo-advisors, including Wealthfront and Acorns. Meanwhile, insurance technology companies only closed on $71.3 million worth of transactions during the month.

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Insurance
Lemonade Growing Premiums Faster Than Esurance's Homeowners Business Did

Feb. 28 2018 — Insurtech startup Lemonade Insurance Co. is demonstrating impressive growth when viewed in the context of Esurance Insurance Co., which was in the vanguard of selling insurance online when it was founded in the late 1990s.

Esurance began writing renters and homeowners insurance more than a decade after its founding. It grew renters and homeowners policies quickly, going from about $9,000 in direct premiums written in the third quarter of 2012 to $25.5 million in the third quarter of 2017. Lemonade, by contrast, hit the $2.5 million mark in five quarters, as opposed to eight for Esurance.

Lemonade premium growing faster than Esurance's reters/homeowners business at same age

While Esurance had already made inroads in auto, renters and homeowners insurance were new territory back in 2012. It began selling renters insurance in five states that year, added homeowners policies in the following yea, and continued to expand both lines over the succeeding years. This data comes from filings submitted to the National Association of Insurance Commissioners. Insurers report only "homeowners" premiums in these filings, but the category is broader than that. It also includes renters insurance.

But there are also differences between Lemonade and Esurance. Since Esurance sells auto insurance, it offers discounts on homeowners insurance to customers that bundle, which Lemonade cannot do. Esurance is also owned by Allstate Corp., a relationship that offers vast capital resources but, at the same time, means that Esurance does not have the same autonomy that a startup like Lemonade possesses.

While Esurance might not have grown its homeowners business as quickly, it bested Lemonade in another area: loss ratios. On average, its loss ratio was about 70% in its first five quarters of operation, versus 102% for Lemonade. The first quarter of 2017 was particularly rough for Lemonade, when it recorded a loss ratio of 241%. The company acknowledges these struggles, writing in a January 23 blog post that underwriting was "pretty shoddy" in the early days. But with the influx of more data, its underwriting models have improved, Lemonade wrote.

Geography

In terms of where they write business, the two companies took different paths. Whereas New York was the first state where Lemonade wrote, it is still not a major area of focus for Esurance. Esurance does not write renters business in New York (only homeowners), and in 2016 the state made up less than 1% of its total homeowners direct premiums written. Esurance began with several Midwest states — Illinois, Missouri, Ohio, and Wisconsin — and has not specifically gone after states with large metropolitan areas like Lemonade has. For instance, Esurance has avoided California whereas Lemonade quickly expanded into the Golden State. In the third quarter of 2017, Lemonade wrote 1.7x as many premiums in California as it did in New York.

California eclipsing New York as source of Lemonade Insurance Co.'s direct premiums written ($M)

California is a larger market, however. Insurers wrote about $7.70 billion in direct homeowners premium there in 2016, versus $5.25 billion for New York. State Farm Mutual Automobile Insurance Co. was the leader in California, with about 19.5% of the market, while Allstate captured the most market share in New York, with 14.4%. State Farm was not far behind Allstate in New York, though, with 13.8% of the market.

While fourth-quarter 2017 statutory data is not yet available, we know that Lemonade entered Nevada, Ohio and Rhode Island in October and November, based on the company's website. Lemonade has notably avoided Florida, which is not only the largest homeowners insurance market in the U.S., but also has a high average premium relative to the number of households there.

Other startups have also been taking their time before entering the Sunshine State. As Swyfft LLC CEO Sean Maher explained, coastal states require a significant amount of expertise. But his company plans to do business there soon, shooting for a June launch.

Competition

As Swyfft shows, Lemonade has some competition from other insurtech startups. Hippo Analytics Inc. and Kin Insurance Inc. are other examples, though they do not also write renters business like Lemonade does. Meanwhile, there are a handful of companies that offer renters insurance, but not homeowners insurance. These companies write in more states, which makes sense given that it takes much more volume to achieve the same amount of revenue from renters insurance that one would receive from homeowners insurance. On average, annual U.S. renters premiums were only about one sixth of U.S. homeowners premiums in 2015, based on data available from The Insurance Information Institute, an industry association.

u-s-insurtech-companies

We estimate the potential renters insurance market in the U.S. is about $8 billion in size. By our calculations, California was the largest market for renters insurance, at roughly $1.2 billion, followed by Texas with about $854.4 million and New York with $720.4 million.

Esurance can be a case study for the renters insurance market as well. It offered renters insurance in more than 20 states as of the end of 2016, though there were only three where it offered renters but not homeowners coverage: Arkansas, Louisiana, and West Virginia. They illustrate how much less the renters insurance line produces in terms of premium. In 2016, it only generated $423,000 in combined premium from those states.

Selling renters and homeowners insurance online is not a new concept, but companies like Lemonade seem to be putting a new spin on it. Lemonade has added more innovations — such as a chat bot named Maya — and has streamlined the process, which appears to be winning over customers. Whether it can achieve this growth while also turning a profit, though, remains to be seen.

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U.S. Life & Health Insurance Market Report

Highlights

U.S. life industry direct premiums and considerations will decline for the first time in four years in 2017 as regulatory uncertainty stymies sales of certain types of individual annuities, a new S&P Global Market Intelligence report projects.

Jul. 25 2017 — U.S. life industry direct premiums and considerations will decline for the first time in four years in 2017 as regulatory uncertainty stymies sales of certain types of individual annuities, a new S&P Global Market Intelligence report projects.

The U.S. Life and Health Insurance Market Report presents a five-year outlook for premium writings in the life, annuity, and accident and health business, along with other select measures of industry performance.

We project direct premiums and considerations across the life, annuity, and accident and health business lines of approximately $654.6 billion, down 1.2% from 2016's record result of $662.6 billion. In subsequent years, we project low- to mid-single digit percentage growth in direct premiums and considerations in reflection of an expected rebound in annuity sales.

The projection for lower direct business volume in 2017 reflects an expectation for a sharp decline in ordinary individual annuity considerations as companies navigate the uncertainty associated with the implementation of the U.S. Department of Labor's Conflict of Interest rule, more commonly known as the fiduciary rule. Direct ordinary individual annuity premiums and considerations fell by 10.9% year-over-year in the first quarter of 2017 as lack of clarity about the manner in which the new presidential administration planned to proceed with the fiduciary rule's implementation, if at all, weighed on sales.

Our outlook projects a decline in ordinary individual annuity premiums and considerations of 11.5% in 2017, followed by a rebound in subsequent years as the industry gets a better handle on the new regulatory landscape.

Demand for pension risk transfer agreements represents a key factor supporting a positive near-term outlook for direct group annuity premium and considerations. S&P Global Market Intelligence projects growth in group annuity direct premiums and considerations of 3.3% in 2017, helping to partially offset the expected reduction in ordinary individual annuity business. It remains too early to tell how recently completed, proposed, and rumored transactions involving the structures of several large U.S. life insurance groups may impact premium growth trends. MetLife's separation of most of its U.S. retail businesses into Brighthouse Financial Inc represents the most impactful transaction given the company's standing as the largest U.S. life insurer by asset size, but it is hardly the only potentially transformative deal in the works. AXA announced plans in May to pursue an initial public offering of a stake in its U.S. life business. Published reports recently indicated that Manulife Financial Corp. may be eying a similar approach for John Hancock Life Insurance Co. (USA) and its affiliates.

A higher interest rate environment would also be beneficial for an industry that has struggled through a low-for-long rate environment. Yields on the 10-year treasury note through the first six and a half months of 2017 have remained well above the sub-2% levels that persisted through much of 2016. But they have not recently revisited their December 2016 highs, suggesting that a conservative approach to product design and pricing remains in order.

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