Category Archives: Regulation

Auto Insurance, Homeowners Insurance, Hurricanes, Insurance Fraud, Insurers and the Economy, Legal Environment, Market Conditions, Regulation

Louisiana’s Insurance Woes Worsen as Florida Works to Fix Its Problems

Leave a comment

As Florida strives to address the issues that led to its current property/casualty insurance crisis, another hurricane-prone coastal state, Louisiana, is navigating its own insurance troubles.

The Louisiana property insurance market has been deteriorating since the state was hit by a record level of hurricane activity during the 2020/2021 seasons, Triple-I says in a new Issues Brief on the state’s insurance crisis. Twelve insurers that write homeowners coverage in Louisiana were declared insolvent between July 2021 and February 2023.

“While similarities exist between the situations in these two hurricane-prone states, the underlying causes of their insurance woes are different in important ways,” said Mark Friedlander, Triple-I’s director of corporate communications. “Florida’s problems are largely rooted in decades of litigation abuse and fraud, whereas Louisiana’s troubles have had more to do with insurers being undercapitalized and not having enough reinsurance to withstand the claims incurred during the record-setting hurricane seasons of 2020 and 2021.”

Insurers have paid out more than $23 billion in insured losses from over 800,000 claims filed from the two years of heavy hurricane activity. The largest property loss events were Hurricane Laura (2020) and Hurricane Ida (2021). The growing volume of losses also drove a dozen insurers to voluntarily withdraw from the market and more than 50 to stop writing new business in hurricane-prone parishes.

This is not to say legal system abuse is absent as a factor in the Louisiana’s crisis – quite the opposite, as highlighted by Insurance Commissioner Jim Donelon’s cease-and-desist order, issued in February, against a Houston-based law firm. According to Donelon, the firm filed more than 1,500 hurricane claim lawsuits in Louisiana over the span of three months last year.

“The size and scope of McClenny, Moseley & Associates’ illegal insurance scheme is like nothing I’ve seen before,” Donelon said. “It’s rare for the department to issue regulatory actions against entities we don’t regulate, but in this case, the order is necessary to protect policyholders from the firm’s fraudulent insurance activity.”

McClenny Moseley has since been suspended from practice in Louisiana’s Western District federal court over its work on Hurricane Laura insurance cases.

A regular on the American Tort Reform Foundation’s “Judicial Hellholes” list, Louisiana’s “onerous bad faith laws contribute significantly to inflated claims payments and awards,” according to a joint paper published by the American Property Casualty Insurance Association (APCIA), the Reinsurance Association of America (RAA), and the Association of Bermuda Insurers and Reinsurers (ABIR).

“Insurers who fail to pay claims or make a written offer to settle within 30 days of proof of loss may face penalties of up to 50 percent of the amount due, even for purely technical violations,” the paper notes. “To avoid incurring these massive penalties, which are meted out pursuant to highly subjective standards of conduct, insurers sometimes feel compelled to pay more than the actual value of claims as the lesser of two evils.”

As a result of these converging contributors, Louisiana Citizens Property Insurance Corp. – the state-run insurer of last resort – has grown from 35,000 to 128,000 policyholders over the past two years, according to the Louisiana Department of Insurance.

Learn More:

Louisiana Insurance Regulator Issues Cease & Desist Order to Texas Law Firm

Hurricanes Drive Louisiana Insured Losses, Insurer Insolvencies

Insurers and the Economy, Legal Environment, Market Conditions, Regulation

U.S. Study of 3rd-party litigation funding
cites market growth,
scarce transparency

Leave a comment

At the end of 2022, the U.S. Government Accountability Office (GAO) released a report, Third-Party Litigation Financing: Market Characteristics, Data and Trends. Defining third-party litigation financing or funding (TPLF) as “an arrangement in which a funder who is not a party to the lawsuit agrees to help fund it,” the investigative arm of Congress looked at the global multibillion-dollar industry, which is raising concerns among insurers and some lawmakers.  

The GAO findings summarize emerging trends, challenges for market participants, and the regulatory landscape, primarily focusing on the years between 2017 and 2021. 

Why a regulatory lens on TPLF is important 

The agency conducted this research to study gaps in public information about the industry’s practices and examine transparency and disclosure concerns. Three Republican Congress members – Sen. Chuck Grassley (IA), Rep. Andy Barr (KY), and Rep. Darrell Issa (CA) — led the call for this undertaking.  

However, as GAO exists to serve the entire Congress, it is expected to be independent and nonpartisan in its work. While insurers, TPLF insiders, and other stakeholders, including Triple-I, have researched the industry (to the extent that research on such a secretive industry is possible), the legislative-based agency is well positioned to apply a regulatory perspective.  

Example of Third-Party Litigation Financing for Plaintiffs

The report methodology involved several components, many of which other researchers have applied, such as analysis of publicly available industry data, reviews of existing scholarship, legislation, and court rules. GAO probed further by convening a roundtable of 12 experts “selected to represent a mix of reviews and professional fields, among other factors,” and interviewing litigation funders and industry stakeholders. Nonetheless, like researchers before them, GAO faced a lack of public data on the industry.  

Third-party litigation funding practices differ between the consumer and the commercial markets. Comparatively smaller loan amounts are at play for consumer cases. The types of clients, use of funds, and financial arrangements can also vary, even within each market.  

While most published discussions of TPLF center on TPLF going to plaintiffs, as this appears from public data to be the norm, GAO findings indicate: 1) funders may finance defendants in certain scenarios and 2) lawyers may use TPLF to support their work for defense and plaintiff clients.

How the lack of transparency in TPLF can create risks 

Overall, TPLF is categorized as a non-recourse loan because if the funded party loses the lawsuit or does not receive a monetary settlement, the loan does not have to be repaid. If the financed party wins the case or receives a monetary settlement, the profit comes from a relatively high interest payment or some agreed value above the original loan. Thus, the financial strategy boils down to someone gambling on the outcome of a claim or lawsuit with the expressed intention of making a hefty profit.  

In some deals, these returns can soar as high as 220%–depending on the financial arrangements–with most reporting placing the average rates at 25-30 percent (versus average S&P 500 return since 1957 of 10.15 percent). The New Times documented that the TPLF industry is reaping as much as 33 percent from some of the most vulnerable in society, wrongly imprisoned people.

Usually, this speculative investor has no relationship to the civil litigation and, therefore, would not otherwise be involved with the case. However, the court and the opposing party of the lawsuit are typically unaware of the investment or even the existence of such an arrangement. On the other hand, as the GAO report affirms, knowledge about the defendant’s insurance may be one of the primary reasons third-party financers decide to invest in the lawsuit. This imbalance in communication and the overall lack of transparency spark worries for TPLF critics. GAO gathered information that highlighted some potential concerns. 

Funded claimants may hold out for larger settlements simply because the funders’ fee (usually the loan repayment, plus high interest) erodes the claimant’s share of the settlement. Attorneys receiving TPLF may be more willing to draw out litigation further than they would have – perhaps in dedication to a weak cause or a desire to try out novel legal tactics – if they had to carry their own expenses.  

Regardless, typically neither the court, the defendant, nor the defendant’s insurer would be aware of the factors behind such costly delays, so they would be unable to respond proactively. However, insurance consumers would ultimately pay the price via higher rates or no access to affordable insurance if an insurer leaves the local market. 

As the report acknowledges, a lack of transparency can lead to other issues, too. If the court does not know about a TPLF arrangement, potential conflicts of interest cannot be flagged and monitored. Some critics calling for transparency have cited potential national security risks, such as the possibility of funders backed by foreign governments using the funding relationship to strategically impact litigation outcomes or co-opting the discovery process for access to intellectual property information that would otherwise be best kept away from their eyes for national security reasons. 

Calls for TPLF Legislation 

GAO findings from its comparative review of international markets reveal that the industry operates globally, essentially without much regulation. The report points out that while TPLF is not specifically regulated under U.S. federal law, some aspects of the industry and funder operations may fall under the purview of the SEC, particularly if funders have registered securities on a national securities exchange. Some states have passed laws regulating interest charged to consumers, and, in rarer instances, requiring a level of TPLF disclosure in prescribed circumstances.  

Active, visible calls from elected officials for regulatory actions toward transparency come mostly from Republicans, but, nonetheless, from various levels of government. Sen. Grassley and Rep. Issa have tried to introduce legislation, The Litigation Funding Transparency Act of 2021, requiring mandatory disclosure of funding agreements in federal class action lawsuits and in federal multidistrict litigation proceedings. In December of 2022, Georgia Attorney General Chris Carr spearheaded a coalition of 14 state attorney generals that issued a written call to action to the Department of Justice and Attorney General Merrick Garland.  

“By funding lawsuits that target specific sectors or businesses, foreign adversaries could weaponize our courts to effectively undermine our nation’s interests,” Carr said. 

Triple-I continues to research social inflation, and we study TPLF as a potential driver of insurance costs. To learn more about third-party litigation funding and its implication for access to affordable insurance, read Triple-I’s white paper, What is third-party litigation funding and how does it affect insurance pricing and affordability? 

Insurance Fraud, Insurers and the Economy, Legal Environment, Regulation

Louisiana Insurance Regulator Issues
Cease & Desist Order
to Texas Law Firm

Leave a comment

Louisiana Insurance Commissioner Jim Donelon last week issued a cease-and-desist order against a Houston-based law firm, accusing it of fraud involving potentially hundreds of hurricane-related claims in his state.

“The size and scope of McClenny, Moseley & Associates’ illegal insurance scheme is like nothing I’ve seen before,” Donelon said in a press release. “It’s rare for the department to issue regulatory actions against entities we don’t regulate, but in this case, the order is necessary to protect policyholders from the firm’s fraudulent insurance activity.”

According to Donelon, the law firm filed more than 1,500 hurricane claim lawsuits in Louisiana over the span of three months last year.

The Louisiana property insurance market has been deteriorating since the state was hit by record hurricane activity in 2020 and 2021, to the extent that 11 insurers that write homeowners coverage in Louisiana were declared insolvent between July 2021 and September 2022. Insurers have paid out more than $23 billion in insured losses from over 800,000 claims filed from the two years of heavy hurricane activity. The largest property-loss events were Hurricane Laura (2020) and Hurricane Ida (2021).

In addition to driving insurer insolvencies, the growing losses have caused a dozen insurers to withdraw from the market and more than 50 to stop writing new business in hurricane-prone parishes.

Louisiana’s troubles parallel those of another coastal state, Florida, but there are significant differences. Florida’s problems are largely rooted in decades of legal system abuse and fraud, whereas Louisiana’s have had more to do with insurers being undercapitalized and not having enough reinsurance coverage to withstand the claims incurred during the record-setting hurricane seasons of 2020 and 2021. In general, Louisiana insurers have not experienced the level of excessive litigation that Florida insurers have faced.

“It now appears some trial attorneys are trying to take a page out of the Florida playbook by engaging in litigation abuse against Louisiana property insurers,” said Triple-I Director of Corporate Communications Mark Friedlander. “We commend Commissioner Donelon for quickly addressing these fraudulent practices.”

According to reporting by the Times Picayune/New Orleans Advocate, an investigation by the Louisiana Department of Insurance found the Houston-based firm engaged in insurance fraud and unfair trade practices through Alabama-based Apex Roofing and Restoration and has faced accusations of potentially criminal behavior in courts across the state. In one such case, the paper reported, a woman testified that she had never intended to retain the law firm when she hired the roofing company to fix her hurricane-damaged roof.

“The firm told her insurance company that it represented her and even filed a lawsuit on her behalf, though she said she was unaware of it,” the paper said. 

Legal system abuse is a pervasive problem that contributes to higher costs for insurers and policyholders nationwide, as well as to rising costs generally, given the importance of insurance in development and commerce. Triple-I is committed to informing the discussion around this critical issue.

Learn More:

Hurricanes Drive Louisiana Insured Losses, Insurer Insolvencies

Florida Insurance Crisis Reforms Gain Momentum With Latest Proposal

Florida Auto Legislation, on Heels Of 2022 Reforms, Suggests State Is Serious About Insurance Crisis Fix

Florida And Legal System Abuse Highlighted at JIF 2022

IRC Study: Public Perceives Impact of Litigation on Auto Insurance Claims

A Piecemeal Approach Toward Transparency in Litigation Finance

Insurance Industry, Insurers and the Economy, Regulation

Data Call Would Hinder Climate-Risk Efforts
More Than It Would Help

Leave a comment

A new data-reporting mandate the U.S. Treasury Department’s Federal Insurance Office (FIO) is considering imposing on certain property/casualty insurers raises a variety of concerns both for insurers and their policyholders.

In response to a request for comments on the proposed data call, Triple-I has told FIO that the requested data would be duplicative, could lead to misleading conclusions, and – by increasing insurers’ operational costs – would ultimately lead to higher premium rates for policyholders.

“Fulfilling this new mandate would require insurers to pull existing staff from the work they already are doing or hire staff to do the new work, increasing their operational costs,” Triple-I wrote. “As FIO well knows, state-by-state regulation prevents insurers from ‘tweaking’ their cash flows in response to change the way more lightly regulated industries can. Higher costs inevitably drive increases in policyholder premium rates.”

President Biden’s Executive Order on Climate-Related Financial Risk, issued in May of 2021, emphasized the important role insurers can play in addressing these risks. The order authorizes FIO “to assess climate-related issues or gaps in the supervision and regulation of insurers” and to assess “the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts.”

Triple-I argues that these objectives can be met by using the information insurers already are required to report, as well as other publicly available data. It also suggests that “assessing the potential” for disruptions might not be as productive an endeavor as working to prevent such disruptions by collaborating with the insurance industry to reduce their likelihood.

“There is no dearth of information to help FIO and policymakers address the conditions contributing to climate risk and drive the behavioral changes needed in the near, intermediate, and long term,” Triple-I wrote, reminding FIO that catastrophe-modeling firms prepare their industry exposure data bases from public sources, not insurer data calls. Similarly, abundant public data exists regarding the needs of vulnerable populations and the risks to which they are subject. “What is needed is to build on existing efforts and draw on the voluminous data and analysis already extant to target problem areas that are well understood.”

Insurance availability and affordability are inextricably linked to reducing damage and losses. The best way to keep insurance available and affordable is to reduce the amounts insurers have to pay in claims.

“Less damage leads to reduced claims, helping to preserve policyholder surplus and enabling insurers to limit premium rate increases over time,” Triple-I wrote.

The importance of collaboration with the industry was a major theme of the National Association of Insurance Commissioners (NAIC) response to FIO’s request for comments.

“While we recognize the Treasury’s desire to better understand the impact of climate risk and weather-related exposures on the availability and affordability of the homeowners’ insurance market,” NAIC wrote, “we are disappointed and concerned that Treasury chose not to engage insurance regulators in a credible exercise to identify data elements gathered by either the industry or the regulatory community.”

NAIC contrasted Treasury’s approach to prior data-gathering efforts, such as after Superstorm Sandy, when Treasury initially asked the states for a wide-ranging data set but ultimately agreed to a more focused call. In the current case, NAIC wrote, “The unilateral process Treasury employed thus far is a missed opportunity to work collaboratively with regulators on an issue we have both identified as a priority.”

Insurers are responsibly promoting a more sustainable and resilient environment and economy. The most pressing need now is to help communities adapt and make sure they are adequately insured against events that can’t be prevented.  The NAIC, as well as residual-market administrators in Florida, Louisiana, and California – states where the impacts of climate risk already are playing out – can provide relevant data and insights and help FIO translate them into actionable policy proposals.

Triple-I agrees with the NAIC that FIO should use publicly available data and work with state insurance regulators, who fully understand the risks, market and operational dynamics, and policy structures. Such an approach would spare FIO and insurers unnecessary work and the public unnecessary confusion.

Auto Insurance, Regulation

New Minimum Auto Liability Limits May
Cause Consumers
to Drop Insurance

Leave a comment

By Max Dorfman, Research Writer, Triple-I

Insurance groups argue that new laws in California and New Jersey that raise the minimum auto liability coverage required for drivers may cause price-sensitive consumers to drop their coverage.

The law in California, signed by Gov. Newsom in October, raises the minimum liability coverage to $30,000 per single injury or death, from $15,000; $60,000 per accident, from $30,000; and $15,000 for property damage, from $5,000. These changes are effective January 1, 2025

The New Jersey law, signed in August 2022 by Gov. Murphy, raises the limits in two steps: first to $25,000 per injury, $50,000 per accident and $25,000 for property damage effective on January 1, 2023 and then to $35,000 per injury and $70,000 per accident on January 1, 2026. Coverage for property damage will remain unchanged for the second increase.

To better understand the impact this will have on insurers and consumers, we sat down with Gary R. La Spisa, II, vice president, Insurance Council of New Jersey, and Janet Ruiz, Triple-I’s director of strategic communications, who specializes in the California insurance landscape.

Why are these laws being passed now?

La Spisa: While the ICNJ understood the need for, and ultimately supported, a move from our current minimums of 15/30/5 to the next currently filed level of 25/50/25 to keep up with average losses, we advocated against imposing a second state-mandated premium increase on drivers with minimum limits.

Ultimately, 1.36 million drivers in New Jersey will face at least one premium hike as a result of the law, at an estimated $130 annual increase. Unfortunately, we cannot estimate the impact of the second hike, as limits of 35/70/25 are not filed in any state. 

Ruiz: We’ve seen medical and repair costs increase dramatically and an increase in accidents and fatalities now that pre-pandemic numbers of drivers are back on the road. While inflation, supply-chain issues and litigation costs are on the rise, we are concerned that this will cause drivers who can’t afford increased limits to drop coverage

What are the consequences of consumers dropping coverage?

La Spisa: Presently, the uninsured motorist rate in New Jersey is estimated to be the lowest in the nation, at 3.1 percent. We are concerned that some drivers will drop coverage, which will push this number up and force carriers to increase rates for uninsured/underinsured motorist coverage.

Ruiz: Consumers who drop coverage risk losing their driver’s license, fines, and inability to register their car with the DMV. California now has the highest number of uninsured drivers in the U.S., estimated at 3.6 to 4.1 million people.

What other effects do you anticipate?

La Spisa: New Jersey law offers a bare bones insurance product, which we refer to as the Basic Policy. We expect that as affordability becomes a greater concern some drivers will opt for this limited product, instead of a full Standard Policy.

Ruiz: California law also offers a bare bones, low-cost auto insurance product, which may get more takers as we face affordability issues for low-income drivers.  The state is expecting fewer underinsured accidents due to the higher limits. We expect to see more drivers in the low-cost auto program and litigation for higher verdict awards for those who have the higher limits.

Do you believe this will have a ripple effect on other states?

La Spisa: Perhaps. The challenge is striking a balance between adequate coverage and affordable premium so to avoid pricing drivers out of insurance all together.

Ruiz: Many states have already increased the minimum liability limits and may not make changes.

How are insurers responding to these price hikes, or planning to?

La Spisa: Most companies already have a 25/50 bodily injury and a $25,000 property damage product filed in New Jersey, so the impact of the first increase on carriers is primarily on the administrative and IT front as they reprogram their systems and renew policyholders with current minimums at the new standard.

For the second increase, carriers will have significant work to do, including determining pricing for this new limit which does not exist anywhere in the country and filing this new product with the Department before rolling it out.

Ruiz: Insurers will adapt to the new law. Many are reluctant, due to the affordability issues for low-income drivers.

What can consumers do to deal with these increased costs?

La Spisa: Consumers should carefully review their policies and always consider shopping around to find the policy which best fits their needs and budget.

Ruiz: We recommend that people shop and compare. Ways to save include choosing higher deductibles, bundling home and auto insurance, or dropping comprehensive or collision insurance on older cars with low value.

Auto Insurance, Business Risk, ESG, Homeowners Insurance, Regulation

Matching Price to Peril Helps Keep Insurance Available & Affordable

Leave a comment

Setting insurance prices based on the risk being assumed seems a straightforward concept. If insurers had to come up with a single price for coverage without considering specific risk factors – including likelihood of having to submit a claim – insurance would be inordinately expensive for everyone, with the lowest-risk policyholders subsidizing the riskiest.

Risk-based pricing allows insurers to offer the lowest possible premiums to policyholders with the most favorable risk factors, enabling them to underwrite a wider range of coverages, thus improving both availability and affordability of protection.

Complications arise when actuarially sound rating factors intersect with other attributes in ways that can be perceived as unfairly discriminatory. For example, concerns have been raised about the use of credit-based insurance scores, geography, home ownership, and motor vehicle records in setting home and car insurance premium rates. Critics say this can lead to “proxy discrimination,” with people of color in urban neighborhoods sometimes charged more than their suburban neighbors for the same coverage. Concerns also have been expressed about using gender as a rating factor.

Triple-I has published a new Issues Brief that concisely explains how risk-based pricing works, the predictive value of rating factors, and their importance in keeping insurance affordable while enabling insurers to maintain the funds needed to keep their promises to policyholders. Integral to fair pricing and reserving are the teams of actuaries and data scientists who insurers hire to quantify and differentiate among a range of risk variables while avoiding unfair discrimination.

“There is no place in today’s insurance market for unfair discrimination,” the brief says. “In addition to being illegal, discrimination based on any factor that doesn’t directly affect the insured risk would be bad business in today’s diverse society.”

Learn More:

Bringing Clarity to Concerns About Race in Insurance Pricing

Delaware Legislature Adjourns Without Action on Banning Gender as Auto Insurance Factor

Triple-I: Rating-Factor Variety Drives Accuracy of Auto Insurance Ratings

Auto Insurance Rating Factors Explained

Auto Insurance, Legal Environment, Regulation

Delaware Legislature Adjourns Without Action on Banning Gender
as Auto Insurance Factor

Leave a comment

Delaware’s state Legislature adjourned for the year without the House taking action on Senate Bill (SB) 231, which called for prohibiting the use of gender as a rating factor in personal automobile insurance policies.

The measure was based on research conducted with the Consumer Federation of America that contended many insured Delaware women are charged more than men, even when all other factors are the same. If signed into law, it would have required Delaware’s auto insurers to revisit how they price their personal automobile insurance policies for all drivers. Six states – California, Hawaii, Massachusetts, Michigan, North Carolina, and Pennsylvania – already have similar laws in place.

“The Delaware state Legislature and the Department of Insurance have the right and responsibility to govern and regulate how insurance companies conduct business within the State of Delaware,” Triple-I Chief Insurance Officer Dale Porfilio wrote in response to SB 231, which was approved by the Delaware Senate in April 2022. However, in his letter to Delaware Insurance Commissioner Trinidad Navarro, he raised several concerns with the underlying research, including:

Website Quotes vs. Issued Policies. While the Internet and electronic processing of quotes have dramatically improved the speed and accuracy of quotes, Porfilio wrote, “Many details can change for the portion of quotes which ultimately become issued policies, causing quotes to not be 100 percent accurate for issued premiums.”

Single Hypothetical Insured vs. Range of Actual Insureds. The report studied hypothetical 35-year-old drivers, then drew a conclusion about the full breadth of female and male drivers in the state of Delaware.

Aggregation across Zip Codes. Pricing methodologies are refined to very specific territorial definitions, which vary by insurer, and the report does not describe how the sample was aggregated across Zip Codes.

Porfilio explained that a consequence of enacting S.B. 231 would be a redistribution of who pays how much premium, with most of the premium increases paid by female policyholders (notably at younger ages), and a majority of the premium decreases received by male policyholders.

Critics of U.S. auto insurer pricing practices have expressed concerns that certain rating factors discriminate against certain groups. Triple-I has explained in multiple contexts how U.S. auto insurers use a wide variety of rating factors to accurately price policies.  These factors must conform to the laws and regulations of the state in which the auto insurance policies are sold,  and eliminating any one could force less-risky policyholders to overpay and allow those with greater risk to pay less than they should.

Learn more about auto insurance pricing

Triple-I: Rating-Factor Variety Drives Accuracy of Auto Insurance Pricing

Why Personal Auto Insurance Rates Are Likely to Keep Rising

IRC Releases State-by-State Auto Insurance Affordability Rankings

Catastrophes, Disaster Resilience, ESG, Insurers and the Economy, Regulation

Triple-I Responds to SEC’s Proposed Climate-Risk Disclosure Requirements

Leave a comment

Creating a new layer of federal oversight would neither enhance nor standardize the climate-related disclosures U.S. insurers make to investors, Triple-I said in a letter to the U.S. Securities and Exchange Commission (SEC).

Triple-I’s letter responded to the SEC’s request for public comment on its proposed rulemaking, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”

“The U.S. property and casualty industry supports and can play a constructive role in advancing transparency around weather- and climate-related risks,” Triple-I CEO Sean Kevelighan and Chief Insurance Officer Dale Porfilio wrote. “Indeed, as financial first responders, insurers have a strong ethical and financial interest in facilitating the transition to a lower-carbon economy and in promoting resilience during that transition.”

But adding a new layer of federal oversight to the existing regulatory structure would complicate insurer operations “while providing little to no benefit toward reducing greenhouse gas emissions and adapting to near-term conditions and perils,” the letter said.

The U.S. insurance industry is regulated in more than 50 jurisdictions, receiving more governance and regulatory oversight than any other type of financial service. More than 80 percent of insurers’ investments are in fixed-income – mostly municipal – securities.

“The SEC’s effort overlaps significantly with those of other entities,” Kevelighan and Porfilio wrote, mentioning the National Association of Insurance Commissioners (NAIC) and the states that regulate insurance, as well as the Treasury Department’s Federal Insurance Office (FIO). “Assessing Scope 3 emissions would be particularly onerous for insurers due to the fact that they cover diverse personal and commercial assets and activities, over which they have no control – further, there is currently no accepted methodology for insurers to measure their underwriting-related Scope 3 emissions, which makes the SEC’s proposed requirement premature for our industry.”

Scope 3 emissions are the result of activities from assets neither owned nor controlled by the reporting organization, according to the U.S. Environmental Protection Agency (EPA).

Triple-I recommended that the NAIC climate risk disclosure survey serve as the primary reporting regime for all insurers, allowing for consistent enforcement across ownership structures (public, private, and mutual) while avoiding unnecessary complexity and expenses.

“Property and casualty insurers are no strangers to climate and extreme-weather risk. We may not always have talked about the issue in those terms, but our industry has long had a financial stake in the issue. Consider the fact that insured losses caused by natural disasters have grown by nearly 700 percent since the 1980s and that four of the five costliest natural disasters in U.S. history occurred over the past decade.The industry is committed to disclosure of climate-related exposures, as such information will be integral to insurers’ ability to accurately and reliably underwrite such risks and make better-informed investment decisions,” Kevelighan and Porfilio wrote.

Learn More:

Report: Policyholders See Climate as a ‘Primary Concern’

Climate Risk Is Not a New Priority for Insurers

A Push for Better Building Codes as Catastrophe Losses Mount

Widening and Deepening the Conversation on Climate Risk and Resilience

Emerging Risks, Legal Environment, Regulation

A Piecemeal Approach Toward Transparency
In Litigation Finance

Leave a comment

A U.S. District Court judge in Delaware made his courtroom the latest jurisdiction to require lawsuit participants to disclose whether third-party investors have any stake in litigation being brought before him.

While this is a step toward greater transparency with regard to third-party litigation funding, the standing order by Chief Judge Colm F. Connolly only affects cases in his court. The other three district court judges in Delaware have not issued similar decrees. But the order was made in an extremely influential district. More than half of publicly traded U.S. corporations are incorporated in Delaware, and the state’s laws often govern contracts between businesses.

A booming global industry

Funding of lawsuits by international hedge funds and other financial third parties – with no stake in the outcome other than a share of the settlement – has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even larger, at $39 billion globally, according to Bloomberg.

Third-party litigation funding was once widely prohibited. As bans have been eroded in recent decades, it has grown, spread, and become a contributor to “social inflation”: increased insurance payouts and loss ratios beyond what can be explained by economic inflation alone.

Efforts at transparency

Some progress in toward greater transparency has been made in recent years. Last year, the U.S. District Court for the District of New Jersey amended its rules to require disclosures about third-party litigation funding in cases before the court. The Northern District of California imposed a similar rule in 2017 for class, mass, and collective actions throughout the district. Wisconsin passed a law requiring disclosure of third-party funding agreements in 2018. West Virginia followed suit in 2019.

At the federal level, the Litigation Funding Transparency Act was introduced and referred to the Senate Judiciary Committee in October 2021.

Panelists at Triple-I’s Joint Industry Forum in December 2021 agreed on the importance of requiring disclosure of litigation funding. Insurance groups and the U.S. Chamber of Commerce say litigation funding needs more rules to prevent abuses of the legal system and to protect consumers, who often pay exorbitant interest rates on money they borrow to pay legal expenses.

“By its very nature, third-party litigation financing promotes speculative litigation and increases costs for everyone,” said Stef Zielezienski, executive vice president and chief legal officer for the American Property Casualty Insurance Association in a press release about the Delaware order. “At its worst, outside investment in litigation financing dependent on a successful verdict creates incentives to prolong litigation.”

The Delaware judge’s order requires, in addition to disclosing the name and address of any third-party funder, that parties to any case before his bench must also disclose whether approval by the funder is necessary for settlement decisions and, if so, the terms and conditions relating to that approval.

While strides like this may be small, they add up in the fight to make disclosure of third-party litigation financing a priority in states and in courthouses nationwide.

Learn More:

Social Inflation: What It Is and Why It Matters

Triple-I, CAS Quantify Social Inflation’s Impact on Commercial Auto

What Is Social Inflation and What Can Insurers Do About It?

IRC Study: Social Inflation Is Real, and It Hurts Consumers, Businesses

Business Insurance, Catastrophes, Disaster Preparedness, Disaster Resilience, Industry Financials, Insurers and the Economy, Regulation, Reinsurance, Risk Management

Insurers, Regulators
Push Back on Changes
In S&P Rating Criteria

Leave a comment

Insurers, regulators, and members of Congress have expressed concern about proposed changes in how Standard & Poor’s Global Ratings defines “available capital” in its rating criteria. Specifically, S&P would no longer consider certain debt to be counted as available for purposes of rating insurers’ financial strength and ability to pay claims.

“Disruptive” and an “overuse of market power” is how the Association of Bermuda Insurers and Reinsurers (ABIR) described the measure in an 18-page letter to S&P, which has requested comments by April 29 on its proposed methodology and assumptions for analyzing the risk-based capital adequacy of insurers and reinsurers.

S&P’s proposed changes, in ABIR’s view, would lead to the sudden removal of billions of dollars overnight that otherwise would be available to underwrite catastrophe risk – a sector in which average insured losses have risen nearly 700 percent since the 1980s.

“This debt is viewed as capital by the regulators,” ABIR CEO John Huff says in a news release. “If carriers are forced to restructure debt, they’ll get less favorable terms today. Any replacement debt will increase financial leverage, which is counter to the stability people seek from a rating agency.”

Members of the U.S. House of Representatives and Senate, along with the U.S. state insurance regulators, through the National Association of Insurance Commissioners, have expressed similar concerns about S&P’s proposed change in its rating criteria.

ABIR points out ambiguity in the timing of the rollout of the planned changes, saying, “Insurers and reinsurers will have no time to respond to the new debt treatment before S&P has indicated the changes will go into effect.”

“There is no glide path or grandfathering,” Huff says. “It’s just a cliff. “

Bermuda’s insurers urge the rating agency to provide a transition period for any such changes, as well as grandfathering debt that already is in place.

“If there’s a transition plan, we can work within that,” Huff says. “But having this so abrupt is quite disruptive. Standard & Poor’s should be adding stability, not causing disruption.”