How Natural Disasters Are Shaping the Insurance Industry

Immediate Impact on Claims and Payouts

Natural disasters have led to a significant increase in claims and claim adjustment expenses, with Travelers reporting a 12% rise due to higher catastrophe losses. Allstate highlights the complexities in reserving for hurricane losses, including reporting delays and inspection challenges. AIG emphasizes the substantial costs associated with settling claims from insured events.

"Claims and Expenses Claims and Claim Adjustment Expenses Claims and claim adjustment expenses in the first quarter of 2024 were $6.66 billion, $697 million or 12% higher than in the same period of 2023, primarily reflecting the impacts of (i) higher business volumes, (ii) higher catastrophe losses and (iii) other loss activity in Business Insurance, partially offset by (iv) loss activity related to the disruption in the banking sector in the prior year quarter in Bond & Specialty Insurance." --- (TRV, sec filing, 2024/Q1)

"Reserving for hurricane losses is complicated by the inability of insureds to promptly report losses, limitations placed on claims adjusting staff affecting their ability to inspect losses, determining whether losses are covered by our homeowners policy (generally for damage caused by wind or wind driven rain) or specifically excluded coverage caused by flood, exposure to mold damage, and the effects of numerous other considerations, including the timing of a catastrophe in relation to other events, such as at or near the end of a financial reporting period, which can affect the availability of information needed to estimate reserves for that reporting period." --- (ALL, sec filing, 2024/Q1)

"Loss reserves Liability for unpaid losses and loss adjustment expenses. The estimated ultimate cost of settling claims relating to insured events that have occurred on or before the balance sheet date, whether or not reported to the insurer at that date." --- (AIG, sec filing, 2024/Q1)

Changes in Risk Assessment and Pricing Models

Insurance companies are increasingly incorporating climate change risks into their catastrophe risk assessments, product pricing, and underwriting strategies. Adjustments in baseline risk views for perils like hurricanes, floods, and wildfires reflect increased frequency and severity, leading to positive rate changes in Property and Casualty portfolios and enhanced risk selection and pricing strategies.

"We regularly study these climate change implications and incorporate these risks into our catastrophe risk assessment and management strategy through product pricing, underwriting and management of aggregate risk to manage implications of severe weather and climate change in our insurance portfolio." --- (HIG, sec filing, 2024/Q1)

"As we saw five years ago, when we were the first to call out a change in loss levels tied to an increase in attorney rep rates, sharpening our view of loss costs early in the development of immature accident years and long tail lines positions us to enhance our risk selection, pricing, and claim strategies, ultimately setting us up to outperform in terms of growth and profitability." --- (TRV, earning call, 2024/Q2)

"Overall, Commercial Lines continue to show positive rate change, particularly in our Property and Casualty portfolios and across international markets where market events or withdrawal of capability and capacity have favorably impacted pricing." --- (AIG, sec filing, 2024/Q1)

"The tests are conducted by adjusting our baseline view of risk for the perils of hurricane, inland flood, and wildfire in the U.S. to reflect increases in frequency and severity across the modeled domains for each of these perils." --- (CB, sec filing, 2024/Q1)

"NAIC ratings are based on a model that considers the book price of our securities when assessing the probability of future losses in assigning a credit rating." --- (PGR, sec filing, 2024/Q1)

Role and Importance of Reinsurance

Reinsurance is crucial for managing risks from natural disasters, with companies like Progressive and AIG emphasizing its role in mitigating volatility and exposure to catastrophic events. Despite rising costs, reinsurance remains available, and strategic partnerships help optimize coverage and manage risk effectively.

"While the cost of our reinsurance, in the markets in which we participate, increased for the coverages placed in the beginning of 2024, compared to the prior years, and the availability of reinsurance is subject to many forces outside of our control, we did not, and do not expect to in the near term, experience a significant lack of availability of any of the types of reinsurance that we typically purchase." --- (PGR, sec filing, 2024/Q1)

"And so that we do think there's a lot of capacity pulling back. We have very comprehensive reinsurance to mitigate volatility and enable us to put out limits depending on our risk appetite." --- (AIG, earning call, 2024/Q1)

"In addition, prior to each renewal date, we consider how much, if any, coverage we intend to buy and we may make material changes to the current structure in light of various factors, including modeled PML assessment at various return periods, reinsurance pricing, our risk tolerance and exposures, and various other structuring considerations." --- (CB, sec filing, 2024/Q1)

"We also recently wrapped up our June 1 reinsurance renewals, and we are very comfortable with risk we're taking there, and actually got slightly more competitive rate." --- (PGR, earning call, 2024/Q1)

"Reinsurance Optimization: Strategically partner with reinsurers to effectively manage exposure to losses arising from frequency of large catastrophic events and severity from individual risk losses." --- (AIG, sec filing, 2024/Q1)

Regulatory Changes and Their Impact

Regulatory changes are prompting insurance companies to adapt, with firms like Progressive and Allstate emphasizing compliance and potential capital needs. Travelers highlights the importance of regulatory reform for affordability, while Allstate sees growth opportunities contingent on methodical adherence to new regulations.

"We believe cash flows will remain positive in the reasonably foreseeable future and do not expect we will have a need to raise capital to support our operations in that timeframe, although changes in market or regulatory conditions affecting the insurance industry, or other unforeseen events, may necessitate otherwise." --- (PGR, sec filing, 2024/Q1)

"And we are walking in regulated markets. So when a regulator comes and says that you need to change this, we do this exactly as you do and we feel your pain and we know what you're going for. So we are working with them in Level I and not from here." --- (ALL, Investor Day, 2024/06/25)

"We certainly love other states to follow suit because we think regulatory reform is important as it relates to affordability, not just insurance, but of home ownership and autos." --- (TRV, earning call, 2024/Q1)

"So it is a growth opportunity for us.I didn't cover it because it's not contemplated in this because we're going to be very methodical around as it legalizes, what are the regulatory rules around it and making sure that we're following all of those." --- (ALL, Investor Day, 2024/06/25)

Industry Response to Climate Change

Insurance companies are seeing increased costs in workers' compensation and disability claims due to unmitigated climate impacts, prompting a more active industry stance on climate change. Corporate America is urged to do more, with the insurance sector playing a crucial role in addressing these challenges.

"Based on trends in our workers' compensation and disability claims data, companies that aren't mitigating climate impacts will continue to experience significant increases in costs associated with employee wellness and, in turn, greater impacts to the bottom line." --- (HIG, press release, 2024/04/22)

"It's those sorts of things. The insurance industry is hardly sympathetic. Corporate America needs to do more in this case, and we are all active." --- (CB, earning call, 2024/Q1)

Role of Government and International Organizations

Government and international organizations play a crucial role in shaping the insurance industry by investing in community resilience and involving policymakers in public policy and education initiatives.

""It's critical that government and business decision makers at every level understand how such investments can improve the safety and strengthen the resiliency of their communities," said Marc DeCourcey, Senior Vice President at the U.S. Chamber of Commerce Foundation. Methodology" --- (ALL, press release, 2024/06/25)

""From university faculty and researchers to industry executives and government policymakers, we are grateful to the more than 600 speakers who have joined us in this effort."" --- (TRV, press release, 2024/06/26)