Casualty Quarterly, Winter 2018

Winter 2018
VOL 2 | NO 4

Trade and Economic Policy Impacts on P/C

For this issue’s Q&A, Casualty Quarterly interviewed Robert Hartwig—past president of the Insurance Information Institute and current director of the Center for Risk and Uncertainty Management at the University of South Carolina’s Darla Moore School of Business—about issues ranging from the effects of tariffs on auto and homeowners insurance costs to housing and macroeconomics and fiscal policy.

You have written that you expect that recently imposed tariffs will result in higher prices for auto and homeowners insurance. Let’s start with cars. President Trump has proposed a 25 percent tariff on all imported auto parts, both for new cars and aftermarket replacement parts. How big is the impact on repair costs? And what portion of the auto insurance premium does that represent?

There’s no question that the imposition of tariffs on imported auto parts will drive auto insurance costs upward. Auto parts account for approximately 40 percent of total repair costs paid for by personal auto insurers. Drilling down, about 11 percent of total repair costs are derived from imported parts. Working out the math, the estimate is that a 25 percent tariff will increase repair costs in the personal auto line by 2.7 percent, or $3.4 billion, on an annual basis.

Does this affect only imported vehicles, or are domestically produced vehicles impacted as well?

There’s no such thing as a purely “domestically produced” automobile anymore. An estimated 30 to 50 percent of the value of so-called domestic vehicles is actually derived from foreign components. The bottom line is that all makes and models of cars and trucks on the road today are impacted by the tariffs.

Let’s talk about homeowners insurance. How do the new tariffs affect housing?

Tariffs are likely to affect the cost of repairing and rebuilding homes in a number of ways. The Trump administration has slapped Canadian timber with a 20 percent tariff. Approximately 30 percent of lumber used for home construction in the United States originates in Canada. Because American lumber mills can’t (or won’t) ramp up production to meet increased demand for domestic timber, prices will rise, driving up property claim severities across the United States—including after major natural disasters when demand surges

Besides lumber, are other building products affected by tariffs?

The administration’s 25 percent tariff on steel and 10 percent tariff on aluminum will also drive up repair and rebuilding costs. The cost of everything from nails and screws to washing machines and dishwashers (appliances must often be replaced as part of homeowners’ policy contents coverage) is rising as manufacturers pass along higher materials costs. In addition, some imported appliances are subject to tariffs directly.

How big is the impact on building and repair costs?

The impact on building and repair costs is harder to quantify. The National Association of Home Builders has estimated that lumber tariffs will add $6,000 to $10,000 to the construction cost of a median-priced new home.

We’ve been talking about personal lines coverage for auto and homes. Is there a similar effect on commercial coverages?

Commercial auto and property insurers will be faced with analogous tariff-driven increases in claim severity. Commercial auto insurers can expect to see the cost of repairing and replacing vehicles rise by several hundred million dollars. Likewise, building repair costs will rise across the board.

You’ve also expressed concern about growing federal budget deficits and expansion of the national debt, saying this will increase borrowing and push up interest rates. After years of very low, stable interest rates, what should insurers expect in the coming years? And how will that affect insurance consumers?

Wall Street spent much of 2018 climbing an enormous wall of worry. With the Fed aggressively pushing up short-term interest rates and concerns over mounting budget deficits in the wake of the Tax Cuts and Jobs Act of 2017, yields rose through most of 2018—potentially helpful to the yield-starved insurance industry, one of the largest fixed-income investors on the planet. But an escalation of trade tensions and signs of weaker economic growth on the horizon emerged late in the year, causing turmoil in financial markets. Stocks tanked and long-term bond yields plunged.

Looking at the economy in general, do you have any good news for us?

Despite recent market volatility, the economic outlook for the U.S. economy remains recession-free for the year ahead. Unemployment is near a 50-year low and strong consumer and business optimism is powering expenditures that drive personal and commercial lines exposure growth. Growth in the U.S. economy, combined with a modest improvement in the commercial lines rate environment, should be sufficient to drive net written premiums by approximately 4.5 percent in 2019.

P/C Loss Reserves Practice Note to Be Released

The Committee on Property and Liability Financial Reporting (COPLFR) is scheduled to release its updated Statements of Actuarial Opinion on P/C Loss Reserves practice note later this month. The purpose of the practice note is to provide information to actuaries on current or emerging practices relevant to signing NAIC P/C statements of actuarial opinion (SAO) and actuarial opinion summaries (AOS).

It is intended to assist actuaries by describing practices that COPLFR believes are commonly employed in issuing SAOs and AOSs on loss and loss-adjustment expense reserves in compliance with the P/C Annual Statement Instructions for 2018 issued by the NAIC. Actuaries may also find this information useful in preparing SAOs for other audiences or regulators.

Annual Meeting Breakout Sessions Look at Key P/C Issues

Plenary sessions at the Academy’s Annual Meeting and Public Policy Forum in early November covered topics of interest to P/C actuaries, including an address by the U.S. Comptroller General and head of the Government Accountability Office (GAO) Gene Dodaro on fiscal and operational risks to the federal government. Also included were presentations on Big Data—one from a regulatory perspective and the other from an ethical perspective—and a lively professionalism session that challenged participants on their command of actuarial standards of practice, the Code of Professional Conduct, and Qualification Standards.

There were also casualty practice-area breakout sessions on issues including climate risk, the new economy, and government-backed P/C insurance programs.

“The New Economy and Insurance” breakout session drew an overflow crowd. Steve Armstrong, a senior actuary at Allstate and president-elect of the Casualty Actuarial Society, described the rapid expansion of the so-called sharing economy, saying that approximately 80 million Americans currently participate on the demand side while roughly 52 million are on the supply side of these arrangements.

New models are emerging for insuring private automobiles that sometimes are used as taxis or are rented to other users, according to Armstrong. He noted that “personal lines and commercial lines tend to be regulated separately, but in the sharing economy the lines are blurred.”

He expects that various forms of micro-insurance will become more common and says a key question, on both the supply and demand side, is, “How do I know if I am insured?”

David Michaels raised a similar question about workers as he discussed the “gig economy.” He is a professor at George Washington University and is the former head of the Occupational Safety and Health Administration. Michaels described the trend toward workplaces using contractors, subcontractors, and temporary workers, rather than full-time employees.

Numerous studies show that workplace injury rates are highest the first few days that a person is doing a new job. Yet, Michaels says, there are now more than 10 million temporary workers in the U.S. and each of them becomes a new worker five to 10 times per year. Jim Lynch, chief actuary for the Insurance Information Institute and moderator of this discussion, added, “What we’re talking about is fundamental change in the employment relationship.”

In the “Government-Backed P/C Insurance Programs” session, new Academy President Shawna Ackerman opened the program by observing that a special report from the Academy’s Actuarial Soundness Task Force specifically noted that the rules are different for programs that are run or guaranteed by federal or state governments.

Todisco makes a point, as Ackerman (second from right) looks on

Silvia Arbelaez-Ellis described a project she leads at GAO to review all of the insurance programs in the federal government’s portfolio. She says there are about 60 loan guarantee programs and 70 programs that offer compensation or coverage. Frank Todisco, chief actuary at the GAO and a former senior pension fellow at the Academy, explained that GAO is wrestling with how to apply the concept of actuarial soundness to programs that may run statutory deficits or where the Treasury is assumed to be the reserve or where subsidies are required by law. He suggested that the phrase “actuarially unsound” might be reserved to describe only those programs where there is an actual risk to the payment of future benefits.

John Pedrick, chairperson of the Academy’s Workers’ Compensation Committee, described state-run programs and explained how they differ from the private sector. At the top of his list is the fact that most of these programs must take all comers and they often exist to handle risks that the private sector has declined to handle.

In the “Climate Risk and Insurance” session, moderated by Rade Musulin, outgoing Academy vice president for casualty, the panelists looked at the challenges of protecting property in a time of changing climate conditions.

Shana Udvardy reported on the Union of Concerned Scientists’ recent research into the current and projected future effects of rising sea level on properties located along the U.S. coasts. She said that tidal flooding has increased and that $117 billion in current property value is at risk within the next 20 years.

Gabe Maser of the International Code Council discussed the role building codes can play in mitigating damage from flooding and other hazards. Musulin asked whether the code development process takes into account expected changes in the threat from rising sea level and other climate changes. Maser said that not all states are using current versions of the building codes, noting that six states are using versions that are at least 10 years old. “We could use your help” in going to states and regulators to speed up the adoption of the latest code standards, he said.

Australian Institute Launches Climate Index

By Rade Musulin

Two years ago, four North American actuarial organizations, including the Academy, launched the Actuaries Climate Index (ACI), which provides a quarterly measure of extreme weather events and sea levels. It compares values from the current period to those from a historical reference period to help users understand how key metrics are changing over time. The ACI has been well received by the news media, public, policymakers, and actuaries.

This month our colleagues from the Actuaries Institute of Australia launched a “down under” version of the index—the Australian Actuaries Climate Index (AACI). A team led by Tim Andrews, project leader for the AACI, produced the index using data collected from the Australian Bureau of Meteorology (BOM). A group of actuaries from the Institute helped design the index, consulting with many outside parties, including the BOM, Australia’s Commonwealth Scientific and Industrial Research Organization, scientists, and regulators. I served on the actuarial team and was able to bring experience from the North American effort to the project.

The ACI and AACI are similar, though not identical. Both indices provide objective measures of extreme values of various climate metrics, such as temperature, precipitation, wind, and sea level, comparing currently observed values with a baseline period in the past. Both look at sub-regions to identify local variations. The Australian Institute has a webpage for the AACI and produced a video interview (via LinkedIn) with Andrews discussing it.

There are three key differences in the indices:

  • The AACI uses the 99th percentile to identify events, while the ACI uses the 90th.
  • The AACI’s baseline period is 1980–2010, compared to the ACI’s 1960–1990, reflecting a desire in Australia to provide a more concentrated, contemporary view of changes.
  • The AACI’s composite index only includes three components, whereas the ACI includes six. The difference reflects both limitations in the source data in Australia and judgments about which components are most informative.

Both the North Americans and the Australians will be looking to enhance their indices in coming years by examining their correlation with loss data. (The North American actuarial organizations plan to launch a second index, the Actuaries Climate Risk Index, in 2019.) There is a desire among both groups to collaborate where possible. I hope that other international actuarial associations will consider developing climate indices to provide better global coverage.

Rade Musulin, the Academy’s immediate past vice president, casualty (2016–2018), is a member of the Australian Institute’s Climate Change Working Group.

Fall P/C Public Policy Webinar Covers Multiple Issues

The P/C Public Policy Update—Fall 2018 webinar, held in late September, covered  property/casualty issues from the NAIC Summer 2018 National Meeting and other P/C public policy topics of interest, including natural catastrophes; qualifications/credentials for casualty actuaries; travel insurance; and high-deductibles in P/C risk management (e.g., workers’ compensation). Presenters were Casualty Vice President Rade Musulin and Kay Cleary, chairperson of the P/C Extreme Events and Property Lines Committee.

Musulin noted that retained risk has been getting more scrutiny lately, and cited a recent practice note on the topic published by COPLFR. Cleary talked about the cycle of draught, fire, rain and mudslide that has been experienced lately in California and noted several regulatory and legislative initiatives that may change insurance company exposures. She also discussed the ongoing volcanic eruption in Hawaii, saying that volcanoes are “a complicated peril” that create damage that is local and immediate but may have global and long-term impacts as well.

Slides and audio are available free to members (login information required).

Available for Order: P/C Loss Reserve Law Manual

Updated for 2018, the Academy’s forthcoming P/C Loss Reserve Law Manual is designed to help appointed actuaries know the NAIC annual statement requirements for statements of actuarial opinion.

The manual contains a compilation of insurance laws relating to P/C loss and loss expense reserves for all 50 states; Washington, D.C.; and Puerto Rico. It is designed to allow users to directly access each jurisdiction’s laws, making it a useful reference tool for actuaries. The manual will be available for delivery this winter—place your order today.

Legislative/Regulatory Update

Following is an update of key federal and state property/casualty legislation and regulation.

Federal Legislative Activities

Flood insurance remained a key issue for Congress this year, underscored by the 2018 hurricane season.  Following several short-term reauthorizations, Congress passed—and President Trump on Dec. 7 signed into law—a bill to extend the National Flood Insurance Program (NFIP) through Dec. 21. The latest NFIP extension followed a one-week extension that was set to expire Dec. 7, and marks the ninth extension of the NFIP since Sept. 30, 2017. Read the Academy alert.

A conference committee agreement resolving differences between the House and Senate on agricultural program authorization legislation, including legislation on crop insurance, was passed by both houses of Congress the week of Dec. 10. The president is expected to sign the bill. The crop insurance provisions in the legislation will remove hemp as a controlled substance, clarify the definition of cover crop termination to ensure that farmers who use cover crops do not risk losing their crop insurance, and make other minor changes to the federal crop insurance program. Read the Academy alert for more.

State P/C Legislation

During the 2018 lame duck sessions, state legislatures are considering several bills regarding insurance, including:

  • Two auto insurance bills were introduced in the Michigan Senate in November. S.B. 1212 would eliminate a requirement for limousine companies to maintain personal protection insurance and property protection insurance. S.B. 1217 would eliminate the requirement for drivers to maintain no-fault automobile insurance.
  • A bill was introduced in the Pennsylvania House in October that would establish the Pennsylvania Landslide Insurance and Assistance Program within the Pennsylvania Emergency Management Agency. The program would be administered by the Landslide Insurance and Assistance Board using the Landslide Insurance Fund and the Landslide Assistance Fund, with each fund receiving an initial appropriations of $2.5 million.
  • H.B. 749, introduced in the Ohio House in October, would authorize domestic insurers to be designated as domestic surplus lines insurers.

State Regulatory Update

  • The California Department of Insurance proposed amendments (REG−2018−00020) to the state’s automobile insurance rating rule in October that would prohibit the use of an individual’s gender as a factor when setting rates. A public hearing was held on Dec. 3.
  • Virginia Gov. Ralph Northam issued an executive order in November outlining several actions for the state to take in order to mitigate the impacts of flooding and extreme events, including the creation of a “Coastal Resilience Master Plan” that will detail specific actions to adapt and protect the state’s coastal regions.
  • The Colorado Division of Insurance proposed a rule in November that would prohibit insurers from using an individual’s gender identity or sexual orientation as a factor when setting rates and premiums for sickness and accident insurance or health coverage plans.

In the News

  • An Adviser Voice (Australia) story on the Actuaries Institute’s launch of the Australian Actuaries Climate index noted that the new index “was built following the establishment of a similar tool in the United States and Canada.” The new index is similar to the Academy’s jointly sponsored Actuaries Climate Index, launched in November 2016, which provides a quarterly gauge of changes in extreme weather events and sea levels in the United States and Canada. Actuarial Review, the bimonthly magazine of the Casualty Actuarial Society, also reported on the Actuaries Climate Index.
  • A report published by Willis Towers Watson cited the Flood Insurance Work Group’s 2017 public policy monographThe National Flood Insurance Program: Challenges and Solutions.
  • A column in TulsaWorld cited statistics from “A Policy for Fluffy,” a feature about pet insurance from the September/October issue of Contingencies.

Webinar Looks at Catastrophe Modeling

Almost 300 people attended the Academy’s Nov. 9 “Catastrophe Modeling” webinar, which focused on the Casualty Practice Council’s recent monograph, “Uses of Catastrophe Model Output.” Attendees—including some from three different federal agencies and 13 different state insurance departments—heard an overview of how actuaries work with catastrophe models and what is not included in these models. Presenters were Kay Cleary, chairperson of the Academy’s P/C Extreme Events and Property Lines Committee, and committee members Howard Kunst and Minchong Mao. Slides and audio are available free to members.

P/C Speakers Present at Policy Events

John Rollins, a member of the Academy’s Flood Insurance Work Group, was a speaker at an Oct. 18 Capitol Hill seminar, “Flood Insurance—Bridging the Gap,” sponsored by the Property Casualty Insurers Association of America. The Academy’s 2017 National Flood Insurance Program monograph was discussed and also distributed to congressional staff and other attendees.

Steve Kolk, a member of the Academy’s P/C Extreme Events Committee, participated in the Washington state insurance commissioner’s Climate Resilience Summit in late October. Kolk described the Actuaries Climate Index (ACI) and talked about the impact of rising sea levels. “Many people expressed appreciation for the presentation on the ACI,” Kolk said.

Academy Attends CAS Meeting in Las Vegas

Academy President Shawna Ackerman and Executive Director Mary Downs attended the Casualty Actuarial Society’s (CAS) Annual Meeting in Las Vegas in mid-November to honor Brian Brown on his year as CAS president and congratulate Jim Christie as he begins his year as CAS president. There were many other Academy members and staff at this very well-attended meeting. Actuarial Standards Board (ASB) member Christopher Carlson and incoming ASB member Pat Woods also took part in a roundtable on how the ASB operates.


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