With a little help from our (government) friends…

Undoubtedly the biggest story in the US insurance industry this year has been the widespread retrenchment of carriers from cat-prone states, with headlines spreading beyond the trade press and into mainstream news as availability and affordability issues in property and auto have escalated.

For the industry, the challenge is complex with no clear solution without meaningful changes to the environment admitted carriers are operating in.

In a number of states they are facing, to coin a phrase, the perfect storm. Years of underwriting losses from frequency and severity involving primary and so-called secondary perils have in the last couple of years been amplified by the impact of inflation on replacement values, together with soaring reinsurance costs which mean insurers are transferring less risk for considerably more premium.

The ability of admitted carriers to quickly react by changing rate or form is restricted by state regulators, leaving them with limited options.

And the crisis is not just impacting states like California, which have generated the biggest headlines. This year’s record severe convective storm losses have hammered mutuals and other regional insurers in the Midwest especially.

Our two front page articles in this edition of our APCIA dailies look at some of the issues facing property insurers.

In the short term, the retrenchment of admitted carriers is creating opportunities for some in the sector, including the E&S market.

But a long-term solution that enables underwriting capital to flow back into cat-prone states to provide product to insureds is imperative.

Late last week, industry trade bodies testified on Capitol Hill to lay out the challenges the industry faces and propose solutions to create a viable operating environment for risk capital.

Although there are contributions the industry can make through better predictive modeling, product innovation and working with communities to help them better understand the risks they face, a dominant theme of the testimony was the role that government will need to take.

Frank Nutter of the Reinsurance Association of America called for federal programs to incentivize people to live in resilient homes and communities; increased funding for pre-disaster mitigation programs; and the adoption of statewide building codes, among other initiatives.

And Robert Gordon of the APCIA said that reducing government rate suppression and policy form constraints, and allowing competitive private markets to actuarially price risk to expected costs would enable insurance availability.

Insurance affordability can be addressed by improved mitigation and resiliency programs, he argued.

In other words, the current crisis is an industry problem, but it has been created by the framework the sector operates in, and for that to change, legislators will need to get on-side.