{{indexingdisabled}} Best's Review - November 2023 Edition - Bank Failures and Society of Actuaries

Some of the concern about bias is tied to

questions about decision-making and who it is that

is making the calls on decisions. Man or machine?

“You’re assuming that the AI is making a

decision, and it’s really not,” said Jeffrey M. Snider,

general manager, property & casualty, Gradient AI.

“What the AI is doing is, in this context, making a

prediction based on the inputs it’s received. It’s no

different than what we have now.”

“Are we worried about an underwriter making

a biased decision based on the inputs he’s given, or

a claims manager making a biased decision based

on the inputs that she’s given? AI, to the extent it’s

machine learning trained on historical data, reflects

that historical data. We have to be cognizant of

and try to filter out biases that are reflected in that

historical data,” Snider said.

But the industry can’t just put blind trust in the

technology, said Michael Combs, president and

CEO at CorVel Corp.

“The question is, who controls that data, and

are there biases within that data? This is an area I

do believe we need to be careful about, considerate

of, what are we doing with the data, and is it

appropriate? We have to be very intentional,”

Combs said.

Data privacy and security are also significant

issues for the insurance industry because of its use of

consumer data, Edin Imsirovic, director at AM Best,

said.

“Generative AI tools have a well-documented

tendency to provide plausible-sounding answers

that are factually incorrect or so incomplete as to

be misleading,” Imsirovic said. “Then there are data

privacy and security concerns, which are particularly

important for the insurance sector because we

handle very sensitive consumer data.”

“The use of generative AI raises additional

concerns regarding the moral use and protection of

data, which may serve as a barrier to adoption,” he

said.

Next Steps in Regulation

The Innovation, Cybersecurity, and Technology

Committee of the National Association of Insurance

Commissioners is drafting a principles-based model

bulletin on AI and machine learning governance,

Godfread said.

“It’s going to focus heavily on the governance

structure within the companies and making sure

BEST’S REVIEW

•

NOVEMBER 

that what governance procedures you have in place

ensure that there’s monitoring, ensure that there’s

been a bias detection or some kind of oversight to

ensure that this is a fair algorithm,” he said.

“It’s really going to be, as regulators, what are

we going to be looking for when we go in and do

an exam or look at how you’re using these tools,”

Godfread said. “I don’t think they’re going to be

overly prescriptive. These are still in process, and so

we’re still working through it.

“I think we’ve gone from the prescriptive

methodology of trying to get into each algorithm

versus giving some of the high-level principles,”

Godfread said. “You can see they exist within our

AI principles, so this is going to be the next step.

... How do you ensure compliance with these AI

principles at a governance level?”

“We’re going to have some expectations that there

is some monitoring, there’s compliance, and there’s

an inherent fairness there to how you’re operating,”

Godfread said.

Godfread said he does not see the need for a

regulatory overhaul.

“It’s taken me a number of years to get to the

point where maybe we don’t need a wholesale new

change, new model laws, new model regulations,

or things in that space. We can fit this underneath

our existing framework of the Unfair Trade Practices

Act. The other insurance regulations that we already

have on the books.

“It’s just this is a new way to apply the same

service that we’ve applied for well over 150 years in

this industry,” Godfread said.

But successful regulation also depends on trust

and collaboration. “We need to be able to have some

visibility to what the issues are and how they’re being

solved. If we don’t have a space where that industry

can trust us to have that conversation, operating in

silence or operating in the dark is generally more

dangerous,” Godfread said.

While the insurance industry prepares for the

AI future, industry experts pointed out that it is

just one more item in a long line of technological

innovations that have shaped the industry.

“At the end of the day, artificial intelligence is

just another tool,” Godfread said. “We’ve been

through these evolutions before as an industry. You

went through the computer revolution when all of

a sudden we could use Excel spreadsheets and could

stop using hand ledgers.”

The AI Revolution

https://www.munichre.com/specialtyinsurance

Sprouting From Chaos: Opportunity

Brings New Insurers to Florida

Five new carriers have come to the Sunshine State in the wake of legislation

aimed at driving down litigation and opening up the homeowners market.

by Anthony Bellano

ncreased threats from severe weather, a large

amount of litigation and a market that resulted

in six insolvencies in two years doesn’t exactly

scream “bring your business to Florida.” But every

seed sprouts new opportunities, and new legislation

seems to be drawing insurers to a market that’s

desperately in need of some new blood.

The legislation was designed to curtail litigation,

among other measures that could impact rate and

provide a boost to the industry in the Sunshine

State. “The big takeaway is the fact the companies

want to write in Florida because [over] the last

few years, no one wanted to touch Florida. It was

too toxic of an environment,” Mark Friedlander,

director of corporate communications, Insurance

Anthony Bellano

is an associate editor. He can be reached at

anthony.bellano@ambest.com

BEST’S REVIEW

•

NOVEMBER 

Information Institute, said. “Clearly, the legislation

opened the door for these new companies.”

The legislation eliminates Florida’s one-way

attorney fee statute from being a part of future

litigation, and it bars consumers from assigning their

benefits to third parties in property insurance disputes.

It also attempts to temper the growth of Citizens

Property Insurance Corp., Florida’s insurer of last

resort, by requiring property owners to accept coverage

that is up to 20% higher than a Citizens policy.

Additionally, it requires a court to find that an

insurer breached a contract before a bad faith claim

can be made; adds another $1 billion from the

general fund for a Florida Optional Reinsurance

Assistance program; and cuts the time insurers have

to respond to filed claims.

“You have a lot of dislocation in the market

because of the insolvencies that have occurred. That

Florida Property

mailto:anthony.bellano@ambest.com

alone is creating an opportunity for other players

to come in,” Chris Draghi, associate director, AM

Best, said. “The tort reform is a net positive for the

insurance industry within the state, and it certainly

does help the situation for new insurers to come

in and potentially face less litigation than what

counterparts have been subject to in prior years.”

The legislation attempts to create opportunity

out of chaos, but Slide Insurance Co. founder and

Chief Executive Officer Bruce Lucas warned the

state is “its own unique animal.”

“A lot of people see this as a potential opportunity,”

Lucas said. “I think it is, but at the same time, if you

don’t have that good core management team with the

requisite Florida experience, the opportunity is going

to be very limited.”

Lucas has experience in the market. Before

starting Slide, he founded Heritage Insurance

Holdings in 2012. Both companies are now among

the top Florida homeowners insurers, in terms of

market share. There are some Florida connections

for the newest insurers as well.

New Insurers on the Block

Tailrow Insurance Co., Mainsail Insurance Co.,

Orion180 Insurance Co., Orion180 Select Insurance

Co., and Orange Insurance Managers LLC were all

approved to do business in Florida in 2023. They all

“The tort reform is a net positive

for the insurance industry

within the state, and it certainly

does help the situation for

new insurers to come in and

potentially face less litigation

than what counterparts have

been subject to in prior years.”

Chris Draghi

AM Best

came after the passage of H.B. 837 that could boost

the industry.

Former Tower Hill Group President Don Matz

gained approval to launch Orange Insurance in

September. It was approved as a reciprocal exchange,

with members making a surplus contribution that

isn’t subject to commissions or taxes. Once initial

investors—private equity—are repaid, surplus can

build pretty rapidly, Matz said, noting that it is a

better model for Florida.

“Members actually have an ownership interest

in the company so they think like an owner,” Matz

said. “They want to maintain their house and not

be caught up in any sort of potentially fraudulent

or spurious claims activity, or swayed by outside

parties” whose claims pitches have “plagued the

market the past three to four years.”

Tower Hill Group is the fifth largest homeowners

insurer in the state with a 4.44% market share and

$641.9 million in direct premiums written in 2022,

according to BestLink. He said the legislative changes

will relieve some of the pressures associated with issues

such as abusive roof and outsized litigated claims.

BEST’S REVIEW

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NOVEMBER 

“They don’t have all the debt that the

other companies have been facing for

years, battling years of litigation that

has to work its way through the system.

They’re writing business based on a

model of future risk, not of past losses.”

Mark Friedlander

Insurance Information Institute

“I do think the market will return and we want to

be part of that, maybe be one of the leaders,” Matz said,

noting that the company will start writing residential

and commercial habitational property coverage in

December. “People are continuing to move here. I

don’t see that slowing down anytime soon.”

Although Orion180 Select and Orion180

Insurance are Indiana-based insurers, majority owner

Ken Gregg is a Florida resident. He owns 75.4%

of the companies, with the rest of the ownership

divided among various companies not based in the

state, according to the companies’ Schedule Y filings.

Both companies are part of the Orion180 Group

Inc. corporate structure.

Gregg saw a wind-only opportunity in the

state, as the legislation brought new regulations

and changes that made the market a little more

appealing. “Wind is actually an attractive piece of

the puzzle,” he said, noting it can be insured in part

because Florida’s construction codes are what Gregg

considers to be the best in the country.

He said the company, which seeks coastal

properties with replacement values exceeding

$700,000 everywhere except Monroe County, will

evaluate offering homeowners in 2024.

In April, Florida regulators approved HCI

Group Inc.’s plan to form Tailrow as a Florida stock

company with 2.5 million shares of common voting

stock authorized with a per-share par value of $1, all

of which will be held by HCI Group, according to

the Florida Office of Insurance Regulation.

HCI is domiciled in Florida and is the state’s

ninth largest homeowners insurer by market share at

3.77%, according to BestLink. That was down from

3.89% the previous year, but its DPW was $545.3

million, a 10-year high for the company. Its direct

combined ratio was 187.01, only the third time in

BEST’S REVIEW

•

NOVEMBER 

the last 10 years that it exceeded 100.

Mainsail was incorporated in Texas in November

2021 as a wholly-owned subsidiary of Spinnaker

Insurance Co., according to an AM Best financial

report. Mainsail is licensed in 37 states and the

District of Columbia, and

it has

a financial strength

rating of A- (Excellent) from AM Best, based on

Spinnaker’s rating.

Spinnaker grew its DPW in Florida to $42.4 million

in 2022, up from $26.2 million the previous year,

according to BestLink. Its Florida market share is 0.29%.

It was purchased by Hippo Holdings Inc. in 2020.

Mainsail was licensed to do property/casualty

business in Florida in August. At the time, Insurance

Commissioner Michael Yaworsky pointed to the

insurer’s arrival in the market as “evidence that recent

legislative reforms are having a positive impact for

consumers.” Mainsail’s net income in 2022 was $109

million, according to its Schedule Y filing.

A Tough Market Presents Opportunity for

Growth

The insurers are entering a market with a direct

combined ratio of 163.67, the largest since at least

2012, according to BestLink. The trouble presents

opportunities for market growth, in part due to

other insurers leaving Florida and because of the

program instituted to depopulate Citizens. As

companies went insolvent, Citizens inherited their

policies and grew to become the top insurer in

the state, with 15.6% market share, according to

BestLink.

Slide is among the 11 insurers participating in

the depopulation program. Loggerhead Reciprocal

Interinsurance Exchange, which was incorporated in

2022 and began writing business in Florida in 2023,

is another. It also has agreed to take on some of the

Florida Property

115,000 policies Progressive Corp. said it doesn’t

intend to renew by the end of the year.

Loggerhead had $19.8 million in net premiums

written and a $4.7 million net loss in its first year,

according to a Best’s Financial Report. It was

approved to take out up to 1,000 policies from

Citizens over the summer.

In its first year in business in 2022, Slide had the

11th largest market share at 2.89%, and the insurer

had written $417.1 million in DPW, according to

BestLink. Heritage was 12th, with 2.79% of the

share and $402.5 million DPW.

Florida Peninsula Group also is participating in the

program. In 2022, its market share was 4.53%, up from

3.76%, according to BestLink.

Although Slide is participating in the program,

Lucas said acquisitions played a bigger role in the

company’s growth. In March 2022, Slide acquired

all active policies in St. Johns Insurance’s book

of business in Florida and South Carolina, $400

million of premium after that company went into

receivership.

In February, Slide acquired the renewal rights

of about 70,000 policies from United Property &

Casualty Insurance Co., with an option for another

20,000, after that company went insolvent, Lucas

said.

Lucas said he believes new insurers entering

this market face a different environment than the

difficult market in which he launched Heritage in

2012. He noted that increasing reinsurance costs

and low rates for Citizens policyholders make

depopulation more difficult, despite the requirement

that property owners must accept coverage that is up

to 20% higher than a Citizens policy.

“They have a lot of policies that really shouldn’t

be taken out by the private market because of the

risk characteristics and premium,” Lucas said, noting

that the insurtech came to the conclusion that,

of 1.4 million Citizens policies, “only 200,000 to

300,000 tops are viable.”

Draghi and Friedlander are of the same mindset,

with Friedlander noting that Citizens can’t charge

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Inc.

Florida Homeowners Multiperil Insurers With

Increased Market Share (%) Between 2018-2022

actuarially sound rates. “They proposed a 12.1%

statewide increase for their main HO-3 product

this year and the regulators said it was too high.

Last year, they proposed 10.7[%] and ended up at

6.4[%]. The private market is seeing increases at an

average of 42%. That’s a huge gap.”

“It’s been reported that Florida Citizens rates are

comparatively low,” Draghi said. “It’s making them

more competitive in the market than one would

expect. There is a glide path there for them to raise

rates. However, it is regulated and may move slower

than private insurers.”

However, the future could be brighter for the new

insurers. Litigation related to claims filed after the

reforms is down, and the new insurers aren’t facing

the same issues that longtime Florida carriers have

had to deal with in the past.

“The tort reform is expected to lessen the severity of

litigation costs and lessen the bad actors’ involvement

within the state,” Draghi said. “It gives less incentive

for them to get involved and potentially drive up losses

and other costs, which in itself helps improve the

environment for both new and active insurers.”

“Our understanding is the new insurers feel the

legislation is strong enough to set the table for a

stable environment,” Friedlander said. “They’re not

very concerned about legal system abuse impacting

their bottom line. They don’t have all the debt that

the other companies have been facing for years,

battling years of litigation that has to work its way

through the system. They’re writing business based

on a model of future risk, not of past losses.”

Company NameAMB#202220212018

Florida Peninsula Group0187904.533.763.36

First Protective Ins Co0122014.203.893.03

Allstate Ins Group0000083.212.601.71

Slide Ins Co0213432.890.000.00

Tokio Marine US PC Group0187331.431.760.97

Source:

; data as of Sept. 18, 2023.

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Best’s Rankings

US Homeowners Multiperil – Top Writers by State, Canada and US Territories – 2023 Edition

Ranked by 2022 direct premiums written.

($ Thousands)

BEST’S REVIEW

•

NOVEMBER 

Writer

Direct

AK505095205,0770.26.765.81.39.290.8State Farm Group32.9U

Farm Bureau Mutual Ins Co of Arkansas 13.3

CO8102273,806,9302.816.654.30.721.079.0State Farm Group21.2Liberty Mutual Ins Cos15.1

DE4545204382,3990.311.749.01.135.264.8State Farm Group25.8Liberty Mutual Ins Cos10.2

GA663034,595,7743.412.377.01.229.170.9State Farm Group24.8Allstate Ins Group13.6

ID3838184595,6450.415.369.40.823.776.3Liberty Mutual Ins Cos18.1State Farm Group15.5

IN18182672,522,1711.99.364.31.133.966.1State Farm Group23.8Allstate Ins Group9.2

LA20212222,465,8571.815.140.03.133.366.7State Farm Group24.8Allstate Ins Group14.5

MD21202312,463,0571.810.779.51.342.757.3State Farm Group16.5Travelers Group12.3

MAPFRE North America Group 12.2Liberty Mutual Ins Cos9.4

Southern Farm Bureau Casualty Group 15.2

MT4143158527,4910.414.982.91.423.077.0State Farm Group24.1Liberty Mutual Ins Cos16.1

NV3635223844,4950.69.661.41.425.674.4State Farm Group18.7Farmers Ins Group11.9

ALR: Adjusted loss ratio is direct losses incurred divided by the dierence between direct premium earned and dividends paid

to policyholder.

AZ23242672,338,8381.713.378.01.427.073.0State Farm Group16.5Farmers Ins Group12.8

FL1126914,448,51010.816.5125.89.579.620.5

KS28282241,509,0521.19.148.80.526.473.6State Farm Group20.6Amer Family Ins Group15.5

MN15152402,974,1212.212.4158.71.230.969.1State Farm Group25.8Amer Family Ins Group15.2

NJ12122763,425,6422.69.854.21.438.261.9Allstate Ins Group11.9NJM Ins Group11.0

DDCCE: Direct defense and cost containment expense ratio is the former allocated loss adjustment expense (ALAE) ratio.

Insurers that distribute primarily through independent agents.

Insurers that distribute primarily through a direct-selling system or an exclusive agency system.

Note: Data for some companies in this report has been received from the NAIC.

Source:

— State/Line (P/C Lines) - P/C, U.S.; data as of Sept. 11, 2023.

Agency

Writer

AL2422255$2,337,7281.79.954.21.025.274.8State Farm Group27.4Alfa Ins Group13.2

SAA Group19.5

AR31312061,227,3280.911.2119.91.020.879.2State Farm Group26.2

CA3325312,456,4799.311.653.82.429.270.8State Farm Group20.6Farmers Ins Group14.5

CT27272401,855,7501.48.348.51.453.146.9Travelers Group9.1Liberty Mutual Ins Cos8.3

DC5151161200,1640.16.355.91.353.546.6Travelers Group22.5State Farm Group19.4

Citizens Property Ins Corporation 15.6Universal Ins Hldgs Group 10.0

HI4444100461,0100.39.138.91.742.857.3State Farm Group35.2Tokio Marine US PC Group 12.4

IL553074,881,2833.69.966.41.022.677.4State Farm Group33.2Allstate Ins Group12.6

IA33332271,089,4860.811.288.20.941.258.8State Farm Group24.8Nationwide Group10.9

KY29292321,492,0981.19.767.81.424.375.7State Farm Group24.0KY Farm Bureau Group21.2

ME4039189541,7000.49.046.10.945.654.5Liberty Mutual Ins Cos12.2State Farm Group12.0

MA14142863,067,0772.39.241.61.375.025.0

MI11112233,455,0352.68.265.91.138.361.7State Farm Group16.9Auto-Owners Ins Group14.2

MS30302081,323,1941.012.960.91.126.173.9State Farm Group24.1

MO17172272,748,8452.110.052.40.920.479.6State Farm Group24.8Amer Family Ins Group15.5

NE34341971,071,0050.812.2117.60.934.865.3State Farm Group22.8Farmers Mutual Ins Co of Nebraska 10.5

NH4342202522,7240.48.953.31.042.457.6Liberty Mutual Ins Cos14.1State Farm Group10.5

NM3737198726,2030.59.977.41.021.079.0State Farm Group20.2Farmers Ins Group18.1

NY442966,826,4385.19.352.71.552.647.4Allstate Ins Group16.2State Farm Group13.7

NC992593,732,5632.812.467.61.142.757.3State Farm Group16.1

North Carolina Farm Bureau Ins Group 12.3

ND4848176282,6390.28.767.11.429.071.0State Farm Group14.7Amer Family Ins Group12.7

OH1083063,680,8152.88.974.11.243.456.6State Farm Group20.7Allstate Ins Group10.8

OK25252202,144,4471.69.147.71.017.782.3State Farm Group28.6Farmers Ins Group15.7

OR32322111,209,3610.913.862.71.219.880.2State Farm Group21.6Farmers Ins Group15.5

PA773224,235,3503.29.057.91.947.053.0State Farm Group17.6Erie Ins Group15.3

RI3941193543,0210.49.751.81.346.054.0Amica Mutual Group14.2Allstate Ins Group12.5

SC22232602,401,9931.813.956.11.446.853.2State Farm Group20.1U

SAA Group9.1

SD4646184373,6520.313.2160.31.535.564.5State Farm Group20.0Amer Family Ins Group13.2

TN16162662,766,0032.110.465.61.128.171.9State Farm Group23.3TN Farmers Ins Cos17.6

TX2231413,472,63110.113.456.91.231.069.0State Farm Group18.6Allstate Ins Group14.5

UT3536210845,9570.615.263.81.233.067.0State Farm Group16.3Farmers Ins Group11.9

VT4949182246,8940.27.758.90.957.043.0Liberty Mutual Ins Cos12.8VT Mutual Group11.7

VA13132893,152,7402.411.264.41.039.061.0U

SAA Group18.4State Farm Group16.8

WA19192342,484,2051.910.378.51.426.773.4State Farm Group17.3Liberty Mutual Ins Cos13.7

WV4240192526,9020.46.258.51.242.757.3State Farm Group27.2Erie Ins Group18.3

WI26262671,873,3841.49.1116.51.141.358.7Amer Family Ins Group22.9State Farm Group16.7

WY4747165295,5760.213.034.60.017.882.2State Farm Group22.4Farmers Ins Group18.7

Guam 53531320,2560.02.68.60.896.63.4Chung Kuo Ins Co, Ltd GUB 41.5Amer Intl Group24.3

Puerto Rico525230108,3230.10.442.24.099.40.6Universal Ins Group of Puerto Rico 50.6MAPFRE North America Group 32.

U.S. Virgin Is.5454219,8280.0-15.6-38.32.097.4

2.7

Underwriters at Lloyd's, London (VI)

56.7Guardian Ins Group31.0

Canada575714320.05.1-99.9861.50.0100.0FM Global Group100.0Hartford Ins Group0.0

Other 5555293,9490.018.9-41.38.1100.00.0Chubb INA Group60.2Amer Intl Group39.1

N. Mariana Is.565663510.02.653.84.1100.00.0Century Ins Group35.7Tokio Marine US PC Group 31.0

Grand Total1,086$133,799,478100.011.771.12.239.560.5State Farm Group18.3Allstate Ins Group9.0

Market Share

% Change

Premiums

Market

Second Leader

Market

Leading Writer

DDCCE

ALR

State

% of

Grand

Total

Direct

Premiums

Written

No of

Cos

2021

Rank

2022

Rank

Best’s Rankings: Homeowners

Best’s Rankings

Top 25 US Homeowners Multiperil – 2023 Edition

Ranked by 2022 direct premiums written.

($ Thousands)

202220212020202220212020

11State Farm Grou

000088$24,426,70910.818.318.417.860.268.771.531.1

22Allstate Ins Grou

00000812,008,17914.49.08.88.863.373.454.926.4

33Libert

Mutual Ins Cos0000609,728,35816.17.37.06.965.768.060.721.5

44USAA Grou

0040808,852,14310.86.66.76.776.676.869.233.0

55Farmers Ins Grou

0000328,285,4478.96.26.46.563.671.071.731.4

66Travelers Grou

0186746,498,18116.94.94.64.468.765.960.518.9

77Amer Famil

Ins Grou

0001245,783,32315.64.34.24.072.062.462.341.1

88Nationwide Grou

0059873,795,6437.82.82.93.074.872.575.418.7

99Chubb INA Grou

0184983,419,7926.52.62.72.853.161.256.411.3

1010Pro

ressive Ins Grou

0007802,444,27010.21.81.91.783.277.377.24.7

1114Citizens Pro

ert

Ins Cor

oration0117122,257,36879.01.71.10.7144.444.448.170.8

1211Erie Ins Grou

0042832,203,30712.61.71.61.676.763.962.225.6

1312Auto-Owners Ins Grou

0043542,143,11211.91.61.61.783.561.162.519.5

1413Universal Ins Hld

s Grou

0187521,751,18010.71.31.31.393.966.667.294.9

1516Tokio Marine US PC Grou

0187331,194,67413.00.90.90.857.776.057.910.6

1617CSAA Ins Grou

0184601,189,92412.90.90.90.940.061.177.823.9

1721Auto Club Enter

rises Ins Grou

0185151,012,77313.70.80.70.861.964.242.019.9

1818Amica Mutual Grou

0185221,005,9674.30.80.80.970.973.563.042.6

1919Herita

e Ins Hld

s Grou

018891981,4397.20.70.80.887.157.753.776.6

2023Mercur

Casualt

Grou

018195956,90518.10.70.70.660.261.462.623.9

2120Hartford Ins Grou

000048934,6202.70.70.80.849.446.610.36.3

2227Cincinnati Ins Cos004294930,99421.70.70.60.658.060.369.413.9

2325COUNTRY Financial PC Grou

000302877,34310.70.70.70.767.959.779.930.8

2426Auto Club Grou

000312856,44411.70.60.60.784.671.276.729.1

2515Amer Intl Grou

018540844,646-20.90.60.91.050.6-13.548.05.4

25 Writers$104,382,74112.478.077.576.867.867.764.822.2

Total U.S. P/C Industr

$133,799,47611.7100.0100.0100.071.169.266.815.3

Market Share (%)Adjusted Loss Ratios

% of

Company

Premiums

2022

Rank

2021

RankCompany / GroupAMB#

2022 Direct

Premiums

Written

% Change in

Premiums

Note: Data for some companies in this report has been received from the NAIC.

Reﬂects Grand Total (includes Canada and U.S. Territories).

Source:

— State/Line (P/C Lines) - P/C, U.S.; data as of Sept. 11, 2023.

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UNSEEN RISKS

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SOA Panel: Insurers Should

Revisit Risk Mitigation

After Spring’s Bank Failures

The collapse of Silicon Valley Bank in March followed by turmoil in other

midsize banks left a trail of important lessons for the insurance industry that

fueled a recent Society of Actuaries Research Institute roundtable discussion.

By Dale Hall

his year’s turmoil in banking began in

March with the collapse of two midsize U.S.

commercial banks. First, Silicon Valley Bank

Best’s Review

contributor

Dale Hall

managing director of research at the Society

of Actuaries. He can be reached at

dhall@soa.

org

BEST’S REVIEW

•

NOVEMBER 

failed. That was quickly followed by the seizure of

Signature Bank by U.S. federal regulators. Then, in

May, regulators seized First Republic Bank.

In light of these troubling events, the Society

of Actuaries Research Institute recently gathered

an expert panel of actuaries and risk managers

to discuss potential lessons insurers and pension

fund managers might be able to apply to protect

themselves. They looked at topics such as systemic

risks and contagions, liquidity and asset liability

Bank Failures

mailto:dhall@soa.org

management within an environment of rising

interest rates, along with risk management,

governance and regulation.

Systemic Risks and Contagions

Because today’s financial markets are highly

interdependent, systemic risks are a real threat.

Institutional failures could cause ripple effects, not

only within a region or single sector, but at both

the national and international levels. Though the

insurance industry can be faced with political and

legal risks, such as tax law changes, it’s unlikely

that bank failures would lead to the same fate

for insurance companies. However, the recent

bank failures pose a good reason to revisit sound

principles of risk mitigation.

Liquidity and ALM Within an Environment of

Rising Interest Rates

Both the property and casualty and health

insurance sectors, along with pensions, are much

less susceptible to failure due to liquidity risks. They

don’t have the burden of surrender options, so a “run

on the bank” is not a danger. However, life insurance

companies, like banks, are exposed to these risks as

interest rates rise.

A financial crisis could lead to losses for

insurers if they are subjected to market risks

without appropriate hedges. For example, high

interest rates could set off higher-than-expected

account lapses due to policyholders surrendering

their contracts to secure higher crediting rates

elsewhere. In turn, these lapses could result in

insurers being forced to sell assets at losses to meet

liquidity demands.

With these threats in mind, existing risk

management and mitigation solutions are crucial

in today’s volatile rate environment, including:

• Incorporating surrender protections and

restrictions in product design.

• Understanding the true economic value of assets.

• Diversifying the customer base.

Diversification is a useful tool for managing

many types of risk, including unique issuer risks

from assets and reinsurance risks.

In the case of Silicon Valley Bank, the bank

experienced rapid growth during the pandemic

when interest rates were low and had an influx of

capital from tech startups seeking yields, driving

them to invest in places that could provide higher

yields. As a result, the bank had positive duration

assets backing checking accounts, which had no

restrictions on withdrawals. When interest rates rose,

Silicon Valley Bank began experiencing net outflows

and couldn’t generate enough liquidity to cover the

amount of withdrawals due to customers closing

their accounts. High interest rates and depressed

asset values meant selling longer-duration securities,

which incurred significant losses.

Risk Management, Governance and

Regulation

The growing complexity and sophistication

of products involves many risks. As a result, the

insurance industry should conduct deep assessments

of these risks, going beyond the minimum required

by regulations.

In terms of modeling and analysis, there tend to

be three pitfalls:

• Having an over-reliance on models: Excessively

complex models often lead to overconfidence in

results.

• Applying shocks during sensitivity analysis and

ignoring risk clusters: Credit Suisse, for example,

was in a weakened state when a series of stressors

gradually caused it to fail.

• Having a narrow focus on a specific view of

risks.

Additionally, when developing risk models,

it’s important to consider that customer behavior

evolves. So, past experience might not be a good

predictor of future behavior. For instance, banks

might expect withdrawals over a span of a few

weeks based on past customer behavior, but

today, social media can accelerate this process to a

few hours.

There are examples of successful risk management

during crises, and the life insurance industry’s

response to the pandemic is one of these. While

most U.S. life insurers paid more death benefit

claims in 2021 and 2022 than prior to the

COVID-19 pandemic, they absorbed the losses

because they had built up excess capital during

periods of lower mortality. Additionally, in Q1

2020, some insurers enhanced asset liquidity in

anticipation of possible risk clusters.

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Contents