Triple-I: Managing Risk Effectively Protects Policyholders

Several forces – including construction costs that outpace inflation, growing natural catastrophe exposure, and more costly reinsurance – are converging to put upward pressure on property/casualty insurance premium rates across the United States. Florida, Louisiana, and, most recently, California, have been directly impacted.

Recently, some insurers have made the hard decision to stop writing new property insurance policies in California, which is just the latest episode in the state’s navigation of increasingly costly wildfire risk. The number of acres burned in California has grown steadily in recent years, as more people are moving into fire-prone areas of the state. More homes in harm’s way – combined with rising costs of repairing or replacing houses either damaged or lost to fire – leads to increased insured losses. On top of all of this are the underwriting challenges associated with public policy in the state.

Insurers determine premium rates based on actuarially sound risk-based pricing principles. However, in California, public policy dating back to the 1980s mandates constraints to accurately underwriting and pricing risk. In short, Proposition 103:

1. Bars insurers from pricing prospectively based on climate models (which new technologies have helped improve considerably since the late 1980s);
2. Prohibits insurers from incorporating the cost of reinsurance into the price of coverage; and
3. Slows down and restricts the size of property insurance rate increases during the rate approval process by California Department of Insurance.

Addressing these California-specific restrictions on how insurers operate could go a long way toward preventing a Florida- or Louisiana-style insurance crisis. California also must contend with a national trend of legal system abuse – something both Florida and Louisiana have recently recognized and begun to act on.

Triple-I recognizes policyholder anxiety and frustration over rising rates. It’s important for policyholders and policymakers to understand that risk transfer is only one part of successful risk management. Risk mitigation, such as the creation of defensible space in wildfire-prone states, also plays a key role.

Insurance is one of the most heavily regulated industries in the United States, done on a state-by-state basis. Thanks both to that regulatory structure and to the actuarially sound alignment of insurance pricing with the costs of risk, the industry remains financially strong. These two pillars allow insurers to keep their promises to policyholders.