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September 25, 2023

California Paves Way for More Insurance Coverage in Disaster-Prone Areas

California will now let insurance companies consider climate change when offering policies, in exchange for a mandate requiring them to offer coverage in wildfire-prone areas, state leaders announced on Thursday.

“We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change,” California Insurance Commissioner Ricardo Lara said in a statement. “The current system is not working for all Californians, and we must change course.”

As a result of several companies choosing to drop coverage in the state recently, consumers without options are flocking to the state-subsidized Fair Access to Insurance Requirements Plan.

“The FAIR plan has doubled to 3% of the market becoming the insurer of first resort for many Californians and not the last resort as it is intended to be,” Lara said Thursday at a news conference. “A growing FAIR plan is really a big problem for our state because the FAIR plan policyholders are required to pay more for less coverage and concentrating the highest risk properties under the FAIR plan increases the chance that they will be unable to afford a catastrophic disaster.”

An executive order issued by California Gov. Gavin Newsom clears the way for the new regulations.

Insurance companies will give priority to homeowners and businesses who have taken steps to harden their properties to disasters like wildfires, floods and windstorms. Lara said this is first-of-its-kind regulation. Once the new regulations are fully implemented, which is expected by December 2024, insurers will be required to have 85% of new policies they write cover property in areas prone to wildfires. Regulators believe that will help Californians to move off the FAIR plan.

“We’re not going to get to affordability if we don’t tackle the availability issue,” Lara said.

More available options for policies are expected to increase competition for better rates.

“This is yet another example of how climate change is directly threatening our communities and livelihoods. It is critical that California’s insurance market works to protect homes and businesses in every corner of our state,” Newsom said in a statement.

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September 25, 2023

How New York’s Supplemental Spousal Liability Insurance Law Will Impact Personal Auto Policies

Most of us don’t spend time studying the fine print in our auto insurance policies, but if you live in New York State, take a close look: Your premium may have risen — or will soon — because you were automatically enrolled in new coverage you may not even need.

A New York law that went into effect on Aug. 1 requires auto insurers to add a new line of coverage — supplemental spousal liability insurance — for all drivers, even those who are unmarried or are buying coverage for a business.

Policyholders can opt out of the coverage, as long as they do so in writing — something singles should do immediately. Opting out may also make sense for many businesses.

But a question remains: With the cost of auto insurance already on the rise, what do married people stand to gain?

All drivers and passengers, including spouses, already have access to “no-fault” coverage in New York, which pays up to $50,000 for medical care and wage loss, regardless of who was at fault in an accident, insurance experts said.

But if a driver caused an accident and the driver’s spouse was seriously injured — and had expenses above those limits, including pain and suffering — the supplemental spousal liability coverage would allow the injured spouse to seek a bigger payout. He or she would need to file a lawsuit to prove that the driving spouse was culpable.

“The spousal supplemental coverage allows a spouse to sue the other spouse to access this liability coverage, in addition to no-fault benefits,” said Paul Tetrault, senior director, personal lines and counsel, for the American Property Casualty Insurance Association, a trade organization for insurers.

The idea of suing your own spouse is unusual, and insurance experts said they hadn’t heard of this situation’s arising often. But proponents of the change, who include personal injury lawyers, say policyholders are often surprised to learn their spouses aren’t covered.

Before the new law took effect, policyholders could request, or opt into, the coverage.

The cost varies, depending on several factors, but will generally run about 5 percent of the bodily injury premium, according to the New York State Department of Financial Services, or roughly $20 to $84 annually. (This reporter noticed that her premium automatically rose more than $100.) It generally covers up to the policy’s existing bodily injury liability limits.

“The passengers can always bring a lawsuit against the driver — if they cause an accident that causes them injury,” said Mike Jaffe, a partner and personal injury lawyer with Pazer, Epstein, Jaffe & Fein. “But in the case of married couples, coverage often doesn’t exist.”

“It is a bizarre quirk,” added Mr. Jaffe, who is also a former president of the New York State Trial Lawyers Association, a trade group that has lobbied for the law. “This law aims to correct that. It is a low-cost coverage for something that is somewhat rare.”

The New York Trial Association, which spent $1.3 million on lobbying efforts in New York state government last year, has supported the law change for at least a decade.

The insurance industry, however, did not support the law. Ellen Melchionni, president of the New York Insurance Association, a trade group, said the industry believed that “opt-out mechanisms are not consumer friendly and are bound to lead to greater confusion.”

New York is an outlier — most states do not have a statute mandating this coverage, according to the American Property Casualty Insurance Association. But it may be possible to sue one’s spouse and recover damages in other states, a spokesman said.

“The mandate to provide coverage to all policyholders unless they decline the coverage in writing is not common in other states,” he said. “This reinforces the importance of consumers talking with their insurance companies or agents to make sure their policy coverages fit their needs.”

The change took effect on Aug. 1 for new policies, renewals and any sort of modifications to existing policies. The New York Department of Financial Services has a declination form on its website, but your insurer should send you a form that allows you to decline the coverage. A spokesman for State Senator Neil Breslin, a Democrat and the bill’s most recent sponsor, said the Legislature was examining whether it should narrow the law in the coming legislative session. It sunsets on July 31, 2027.

“We certainly don’t want people to pay for coverage that would provide them zero benefit under any circumstances,” the spokesman added.

If consumers are unable to opt out of the coverage even after contacting their insurer, they can file a complaint with the Department of Financial Services.

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September 25, 2023

FTC Poised to Sue Amazon for Antitrust Violations

The Federal Trade Commission is expected to sue Inc. for antitrust violations, according to people familiar with the matter – marking the agency’s fourth swipe at the online retail giant this year. The lawsuit, expected to be filed in federal court by the agency, marks a groundbreaking moment for FTC Chair Lina Khan, who shot to fame as a law student for a legal article about how to rethink antitrust law to apply to Amazon in the digital age. The antitrust complaint is expected to focus on how Amazon’s pricing policies, already the subject of a suit by California’s attorney general, Prime and allegations the company illegally ties merchant access to its marketplace to use of its logistics service, the people said, speaking anonymously to discuss a pending complaint. Prime membership has been a key differentiator for Amazon, helping it convert occasional shoppers into loyal devotees who make the company their default choice when shopping online. Politico first reported the news on Friday. The antitrust and consumer protection agency has had Amazon in its sights for more than four years. The FTC during the Trump administration opened a probe into potential anticompetitive conduct related to several aspects of Amazon’s business, including its marketplace where both the company and third-party merchants sell goods and the Prime subscription service. Under Khan, the agency refined the probe and opened new investigations into the tech company. In August, company executives met with Khan and the FTC’s two other commissioners to discuss the potential suit, though no settlement was offered. The agency sued Amazon in May in two separate cases for failing to delete data about children collected by its Alexa speakers and illegally spying on users of its Ring doorbells and cameras. Amazon said it disagreed with the FTC’s allegations, but agreed to pay $30.8 million to resolve the suits. A month later, the agency filed another suit against the company, alleging that it duped consumers into signing up for the Prime subscription service and then deliberately made it difficult to cancel. Just this week, the FTC amended its complaint to add three Amazon executives as defendants in the case, arguing the trio ignored pleas by employees to stop using techniques “to mislead or trick users” into “signing up for a recurring bill.” The company is contesting the allegations in that case.    
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September 25, 2023

Home Values Could Collapse as Rising Climate Dangers Wreak Havoc on Insurance Markets, Study Says

  • US home values could collapse as climate change boosts insurance costs, a study from First Street Foundation said.
  • More insurers are hiking premiums or leaving at-risk areas, forcing homeowners to rely on costlier state-run programs.
  • First Street estimated that 39 million homes are still insured at prices that don't match the climate risks they face.
Climate change is roiling the US home insurance market, paving the way for a massive correction in property values, a First Street Foundation study said. More insurers are hiking premiums or reducing exposure in risky areas, forcing homeowners to rely on costlier state-run programs. But even then, 39 million US homes are still insured at prices that don't match the climate risks they face, First Street estimated. "This one quarter of all properties represents the current Insurance Bubble of properties likely overvalued due to the underpricing or subsidization of climate risk in their insurance products," the report said, noting that almost no part of the US is left untouched. While the cost of climate-related disasters like floods and wildfires has been soaring, some states continue to limit increases in insurance premiums. In response, top insurers have slashed coverage, forcing governmental "insurer of last resort" programs to step in, often providing less coverage at multiple times the price. Either way, insurance costs are rising, and First Street estimated the impact they will have on a home's value by way of its income potential. For example, a home in California currently valued at $296,000 would see a 39% drop after repricing for estimated insurance risk. A home in West Palm Beach, Florida, could lose 41%. In Louisiana, a home could see a 48% plunge in value, and in Plaquemines Parish, a home could even lose 100% of its value. "The range of property value loss for those 39 million properties is large, ranging from as little as a single dollar to full devaluation with 100% decrease in overall investment value. Those most at risk are property owners that are already stretched to be able to pay for the mortgage and associated costs, even before accounting for the forthcoming increases in insurance," First Street wrote. Prospective home buyers have taken notice of the climate's effect on the housing market. More than four-fifths of house hunters are taking climate-related risks into consideration when looking for a home, according to a recent Zillow survey. Still, despite the climate risks, the housing affordability crisis has boosted migration to areas vulnerable to floods, wildfires, and extreme heat.    
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September 25, 2023

Court Approves Vesttoo to Seize $30M from Fraud Accused Co-Founders & Execs

According to a report in the Israeli media, the Tel Aviv District Court has approved Vesttoo to seize approximately $30 million in assets from its two ousted co-founders, as well as the persons that worked to source investors who have been implicated in the letter of credit (LOC) fraud scheme. Vesttoo went to the Tel Aviv court last week to demand the return of 770 million Israeli New Shekels (approx US $201 million), from co-founders Bertele and Lifshitz. The insurtech said that the compensation is due given the large scale fraud the pair are alleged to have been involved in, that has now driven the company to bankruptcy. On top of that, a further 247 million Israeli New Shekels (almost US $65 million) was being demanded from Udi Ginati, Joshua Rurka and Tal Ezer, who were all named as involved in the sourcing of investors, including those behind the majority of the invalid letters of credit (LOCs). Now, Israeli publisher Calcalist has reported that the court has approved the seizure of some $30 million of assets from these five persons. The court is said to have approved foreclosures of roughly $23 million on the assets of co-founders Bertele and Lifshitz, as well as foreclosures totaling $7.2 million for the other three named above. Vesttoo later in the day confirmed that it filed two injunctions with the district court in Tel Aviv, saying, “The first was a request to seize 768,615,595 NIS from both Mr. Yaniv Bertele, former CEO of the company, and Alon Lifshitz, former Chief Financial Engineer. Furthermore, the company requested that the courts seize 247,238,680 NIS from two former employees of the company, Mr. Udi Ginati and Mr. Joshua Rurka, as well as a former finder for the company, Mr. Tal Ezer. The second request of the district court was for a temporary freeze on the bank accounts, real estate assets and any stock of the above mentioned, as well as a freeze on wire transfers from a bank account in Switzerland. “The court ruled in the company’s favor on both requests, providing a temporary restraining order on the 14th of September. The court approved a foreclosure of 90,002,116 NIS on Bertele and Lifshitz’ assets, as well as 27,602,116 NIS on the other two employees and the finder.” Another publisher, Globes, was first to say that the court arrangement called for assets including apartments to be impounded, rather than bank accounts. Ami Barlev, CEO of Vesttoo, said in a statement following the court decision, “The court’s unilateral approval of the temporary reliefs and foreclosures that were requested confirms the results of the company’s investigation against Mr. Bertele, Mr. Lifshitz, Mr. Ginati, Mr. Rurke, and Mr. Ezer. The request for temporary reliefs was supported by many pieces of evidence. The district court unequivocally states that the evidence presented supports the findings of the investigation conducted by the company. This request for temporary relief is part of a broader legal proceeding that will be discussed later according to the legal procedures, but the fact that the judge imposed these foreclosures and on such a significant scale is the most important thing from our point of view and the proof that the investigation provided true evidence.” It would seem appropriate that any value recovered by Vesttoo in Israel from those implicated in the fraud, should then be subject to and protected by the bankruptcy proceedings in the US, so giving creditors the potential to benefit from those recoveries of value. Calcalist also has statements from the lawyers of Bertele and Lifshitz, which we include below for completeness. Lawyers Tal Shapira and Meirav Bar-Zik, stated on behalf of Bertele, “The request in question, as well as the decision given in it, were not presented to Bertele. As has often been the case, the details were leaked to the media beforehand. The request for relief on which the request for foreclosures is based is an idle request that lacks any factual and legal basis and was unlawfully submitted within the framework of insolvency proceedings in a clear and transparent attempt to avoid paying a toll. It will be rejected outright, along with the request for foreclosures that was submitted alongside it. The decision, which is unknown to Bertele, was given unilaterally without Bertele being given the opportunity to respond to the claims, and there is no need to say that Bertele’s full position in relation to the unfounded claims being made, as well as the flawed and biased investigation procedure that is at the center of it, will be submitted to the court.” Nati Haim, from law firm Agmon and Tulchinsky, said on behalf of Alon Lifshitz that, “The documents have just been handed to them and they will study them and respond to the court. However, it can already be said that the court has rejected most of the requests to impose temporary foreclosures and not without reason. This is a procedure without a legal and factual basis and we are convinced that the court will reject the procedure in its entirety after hearing our arguments. To add to that and worst of all, it is a procedure that is entirely controlled by those who are in an extreme conflict of interest, who served as directors of the company throughout the relevant period and are now trying to vindicate themselves by filing idle procedures.” It is important to remember that nobody has been found guilty of the fraud in a court yet, although the start of criminal court proceedings can only be a matter of time.      
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September 22, 2023

The Future of Fronting Companies

Fronting companies are facing challenges and greater scrutiny amid the recent Vesttoo scandal and Trisura matter with rating agencies and other stakeholders taking a closer look at the use of LOCs for reinsurance collateral. Following is an overview of the fronting market and what happened over the last several months to put this insurance model in the news.

Overview: Fronting Companies

Fronting companies serve as issuing insurance carriers, transferring the majority of premium and risk to reinsurers. They provide their financial strength rating, licensing, and other services primarily to managing general agents (MGAs). During the last five years, the fronting insurance space has grown from a premium size of about $4 billion to exceeding $12 billion, according to a report by Conning, a leading investment management firm with a long history of serving the insurance industry. The expansion of the fronting market has been driven by a number of factors, including an influx of capital, MGA growth, positive rate trends, and increased acceptance of MGAs that use the fronting model. Moreover, according to Conning, access to large volumes of premiums afforded by this distribution route has attracted reinsurers that support these carriers.

The Emergence of the Hybrid Fronting Model

As more capital and new entrants entered the industry, various fronting strategies have emerged in the last several years, according to rating agency KBRA. Some companies retain no exposure while others retain a percentage of the risk on their balance sheet, which is what’s known as a hybrid fronting model. A significant number of fronting carriers gravitated toward a risk retention model of 10%-20%, which reflects a combination of reinsurer demands for fronts to participate directly in the programs they cede to third parties and fronting carriers’ desire to capture a portion of the economics in the programs they underwrite.

Challenges Ahead

However, despite the growth in the fronting market, certain challenges have arisen, and the space is now at an inflection point as described in the Conning report. Significant increases in reinsurance rates indicate that fronting companies are likely to retain more risk. Furthermore, reinsurers are expected to be more skeptical of fronting company initiatives with no track record. Access to finance may also become a problem for some fronting organizations. As a result, it’s expected that consolidation among the 25 or so fronting markets will occur, according to Conning. Then there is the fallout from the recent Vesttoo scandal in which fraudulent letters of credit (LOCs) were issued for reinsurance collateral. This follows what occurred with Canadian specialty company Trisura, which announced in February that its Q4 2022 results included an $81.5 million pretax write-down of a reinsurance recoverable related to a program in its U.S. fronting business.

Inside Vesttoo’s Fraudulent LOCs

 Insurtech Vesttoo, via its digital platform, enabled insurance companies and MGAs to obtain reinsurance through the capital markets for traditional risks. In June, the Israeli company was investigated for allegedly issuing $4 billion in fraudulent or forged LOCs in reinsurance collateral. Since then, Vesttoo has filed for Chapter 11 bankruptcy protection, fired several executives, and laid off half of its global workforce. In addition, an interim investigation revealed “pervasive and systemic misconduct was engaged in by a limited set of Vesttoo executives and other third parties outside of Vesttoo.” These individuals included Vesttoo’s former CEO, CFE, Senior Director/Capital Markets, and Senior Director/Asian Markets along with employees of China Construction Bank and Standard Chartered, which issued the fraudulent LOCs.

How Vesttoo’s LOC Fraud Impacted Fronting Companies, MGAs

On the heels of the Vesttoo scandal, carriers have scrambled to get the right collateral in place, either by replacing Vesttoo’s collateral certificates or by getting more funding to maintain their credit rating. Insurers across the market were fielding requests for replacement capacity to support the billions at risk, including from several fronting companies and some cedents and MGAs.  For example, fronting specialist Clear Blue, which had a significant relationship with Vesttoo, faced questions over the quality of its collateral, whether it exists at all or has any true value. As a result, within weeks, Clear Blue replaced more than half of the coverage needed for reinsurance programs affected by the collateral issues linked to Vesttoo. According to Artemis, Tradesman Program Managers, a specialist MGA wholly owned by Roosevelt Road Capital Partners, secured replacement reinsurance cover for the section of its tower that had been provided through a Clear Blue fronted arrangement with Vesttoo. MGA and insurance carrier hybrid Homeowners of America Insurance Company (HOA), a subsidiary of Porch Group, was also exposed to the Vesttoo LOC fraud and replaced some 84%, or $147 million, of reinsurance affected by the issues by early September. As a result of the Vesttoo fraud, HOA was placed under temporary regulatory supervision by the Texas Department of Insurance (TDI) and remains so today.

Vesttoo Scandal Puts the Spotlight on Fronting Sector’s ERM

 According to KBRA, the Vesttoo case highlights the fronting sector’s enterprise risk management (ERM). KBRA “believes it’s increasingly important for fronts to maintain robust risk management processes and for management teams to be focused on continuous ERM improvement.” The rating agency provided areas for potential improvement in the fronting sector, including:
  • Implementing more stringent diversification requirements for collateral providers
  • Not binding policies until after LOCs have been verified
  • Reducing the relative amount of exposure to LOCs and increasing the amount of collateral held in trust
  • Reducing the portion of unrated and captive entities on reinsurance panels
KBRA noted that “recent negative events underscore the critical importance of effective enterprise risk management (ERM) and could be positive catalysts for change.”

What AM Best Had to Say About Vesttoo and Fronting Companies

AM Best also weighed in on managing counterparty risk amid the Vesttoo fraud fallout. The rating agency has been monitoring the Vesttoo situation and reviewing its rated fronting carriers, as well as other insurers that have material amounts of reinsurance counterparty credit risk and reliance on various forms of collateral.

Fitch Ratings Sees Possible Change with LOC Collateral

Fitch Ratings expects the impact from Vesttoo to be widespread and potentially long-lasting, perhaps triggering a change in how the industry operates regarding LOC collateral. “The investigation on possibly forged collateral linked to reinsurance deals facilitated by insurance technology facilitator Vesttoo Ltd. may decrease the usage of letters of credit as collateral in the wider reinsurance market,” Fitch said. “Fronting companies and managing general agents, whose business often relies on LOCs, may face lower available capacity and tighter terms.” However, Fitch also indicated that this is an opportunity for some capacity or capital providers to come in and give efficient collateral to support MGA and fronting companies’ reinsurance needs, which we have already witnessed since the Vesttoo scandal came to light.

ALIRT Questions How Industry Stakeholders Missed Vesttoo’s Fraud

A white paper from ALIRT Insurance Research outlined its difficulty in understanding how different participants in the industry missed the alleged fraudulent LOC issue surrounding Vesttoo. According to ALIRT, all parties involved, from wholesale brokers and their reinsurance broker partners to the issuing insurers and their reinsurance counterparties, as well as Vesttoo, “bear some responsibility for this mishap.” “While we concede that this was likely a well-designed fraud, it is difficult to fathom that it was able to evade multiple levels of due diligence purportedly carried out by these different participants. That is, unless corners were being cut in the race to place premium into difficult corners of a challenging P&C market,” reads the white paper. ALIRT analyzes the relative financial performance of insurers on behalf of insurance distributors, insurers, institutional buyers, and analysts to satisfy their risk management, due diligence, and marketing and research needs.

Conclusion: What’s Next for the Fronting Market?

Most in the industry expect the fronting industry to be well positioned to learn lessons from the Vesttoo scandal and Trisura write-down and perhaps emerge as a stronger and more robust member of the broader insurance market. Improved ERM and due diligence will result in the wake of recent challenges.    
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September 22, 2023

California Leaders Announce Major Home Insurance Reform in Light of Wildfires, Floods

Gov. Gavin Newsom and California's Insurance Commissioner said they are overhauling the regulation of the state's home insurance market that's changed drastically because of disasters caused by climate change, which will likely make the insurance more available but also more expensive.

"The changes I’m announcing today are aimed at modernizing the insurance market and protecting consumers," Insurance Commissioner Ricard Lara said at a Thursday news conference.

He described the changes, over the next year, as the state’s biggest insurance regulation reform since voters in 1988 toughened rate regulation.

Lara’s announcement came after Newsom issued an executive order telling the insurance commissioner take "swift regulatory action" to speed approval of rate increases and for the first time let insurers factor into homeowners’ rates the increasing risks of extreme weather and wildfires fueled by climate change.

"It is critical that California’s insurance market works to protect homes and businesses in every corner of our state," Newsom said in a statement announcing the order. "A balanced approach that will help maintain fair prices and protections for Californians is essential."

The order takes into account climate change, and how wildfires, floods and droughts have changed the landscape – and what should be covered under insurance.

Some companies, including State Farm and Allstate,  have already announced they will stop issuing policies in California, and others are limiting policy renewals.

Newsom's order will increase the insurance commissioner's ability to stabilize the market by increasing the coverage options for renters and homeowners especially for those who live in wildfire prone areas. Insurance companies will be able to consider climate risks when setting insurance rates. It will also speed up the approval process for certain plans.

Newsom hopes this new plan will also incentivize smaller insurance companies, which are still issuing new policies, from leaving the state.

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September 22, 2023

Ransomware Drives 12% Uptick in H1 Cyber Claims: Coalition

Cyber claims increased 12% in the first half of 2023 thanks in large part to a 27% increase in ransomware claim frequency, according to Coalition’s latest Cyber Claims Report. Ransomware accounted for 19% of all reported claims during the first six months of the year. Funds transfer fraud (FTF) accounted for 31% of all cyber claims, and business email compromise (BEC) accounted for 26% of all claims. “The cyber threat landscape has become more volatile, and, as a result, we’ve seen claims become more severe and more common than ever,” Chris Hendricks, head of Coalition Incident Response, said in a statement. In addition to the jump in frequency, ransomware claims severity reached a record-high with an average loss amount exceeding $365,000 – a 61% increase within six months and a 117% increase within one year. Ransom demands in the first half averaged $1.62 million, a 47% increase over the previous six months and a 74% increase over the past year. Coalition noted that 36% of policyholders paid a ransom in the first half, though the insurer negotiated the amount down to an average of 44% of the initial demand on behalf of clients. The most prominent ransomware variants of the first half were BlackCat (12% of all reported variants), Royal (12%), and LockBit 3.0 (11%). LockBit 3.0 shot into third place after accounting for just 3% of all ransomware variants in the previous six-month period. Royal remained steady and BlackCat decreased slightly from 15%. FTF claims frequency increased 15% in the first half, according to the report. FTF initial severity – which is calculated prior to recovery activities – increased by 39% to an average loss of more than $297,000. This was still well short of the historic high of $410,000 recorded in the first six months of 2021. BEC claims frequency decreased by 15%, while severity dropped by 7% to an average loss of $21,000. “Many of the [cyber] claims we received this year could have been prevented with stronger security controls and better cyber risk management decisions,” Coalition wrote in the report. About 14% of Coalition policyholders received at least one security alert regarding a critical vulnerability in the first half, and 47% of them successfully resolved the issue within 30 days of notification. The firm recommended organizations implement multi-factor authentication on all critical accounts, maintain credible offline backups of critical business data, establish a formal procedure for electronic payments, patch all software and firmware regularly, and deprecate legacy and risky technologies.    
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September 22, 2023

Lyft to Pay $10M for Concealing Director’s Role in Pre-IPO Stock Sale

Ridesharing company Lyft Inc. has agreed to pay a $10 million civil penalty to resolve Securities and Exchange Commission (SEC) allegations that it failed to report a board director's involvement in a $424 million private share sale before the company's initial public offering (IPO). In a Sept. 18 statement released, the SEC said that prior to the company's IPO in March 2019, a Lyft board director orchestrated a deal allowing a shareholder to offload approximately 7.7 million shares of stock to a special purpose vehicle (SPV) set up by an affiliated investment adviser. The same director, whom the regulator did not name, then approached an investor interested in acquiring the shares through the SPV. The SEC claimed that Lyft was directly involved in the deal, having approved the sale and negotiated a number of the contract's provisions. It said that the director was considered a related person due to his position and the millions of dollars he received from the investment adviser for his role in structuring the deal. The SEC alleged that Lyft failed to disclose the transaction and the director’s material interest in that sale in its 2019 Form 10-K filing, or in any subsequent Exchange Act filings. The regulator also found that the director had left the board at the time of the transaction. "The federal securities laws mandated that Lyft disclose a director's financial gain from a transaction in which Lyft itself played a significant role," said Sheldon L. Pollock, Associate Regional Director of the SEC's New York Regional Office. "We are committed to safeguarding the interests of investors by ensuring they have access to essential information concerning transactions close to a company's IPO." Without admitting or denying the allegations, Lyft agreed to a cease-and-desist order.    
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September 22, 2023

New California Climate Law Pulls In Private Companies

California is poised to force many private businesses to report on carbon emissions, dramatically increasing the number of U.S. companies that could be subject to some kind of U.S. climate reporting.

Gov. Gavin Newsom on Sunday said he would sign landmark legislation that would require businesses, including those privately held, to begin reporting on emissions if they operate in California and have at least $1 billion in revenue. In addition to their direct emissions, those businesses would have to account for emissions by suppliers and customers, so-called “Scope 3” emissions that are considered more nebulous and difficult to pin down.

The number of companies that would be subject to the disclosure requirements could be far larger than the number that would be caught under a similar disclosure rule proposed by the Securities and Exchange Commission, which doesn’t directly oversee privately held businesses. Around 5,300 businesses could be subject to the reporting requirements, including more than 3,900 privately held companies, according to estimates from Scott Wiener, the California state senator who put forward the legislation.

Those private companies won’t only bear the direct cost of the new carbon accounting requirements, but also the potential reputational damage as their environmental impacts come to light. It could also disrupt what is known as “brown spinning,” in which public companies spin off high-emitting assets to private companies that can profit from them with less scrutiny.

“To be honest, I think companies are gonna start saying, ‘Oh crap, this might actually happen and we are probably going to have to report,’” said Mallory Thomas, a partner with the risk advisory practice at consulting firm Baker Tilly. Apple, Alphabet’s Google, Salesforce and other prominent public companies came out in favor of the legislation. Some privately held companies also joined the push for the legislation, including beer brewer Sierra Nevada Brewing, clothier Eileen Fisher and outdoor brand Patagonia.

Those companies and others said legislation such as California’s was needed to “cover privately held and midmarket companies to better ensure economy-wide accountability and action.”

The California Chamber of Commerce, though, has labeled the measure an “onerous” burden on small businesses and called current methods of calculating Scope 3 emissions flawed. A spokeswoman for the chamber said the organization is “disappointed” with Gov. Newsom’s plan to sign the bill and welcomes “anticipated clean up legislation next year that will address impacts on small business.”

Newsom has said he may request some changes to the bill. Wiener has said it isn’t clear what specific changes Newsom wants but that it is unlikely the legislature would agree to remove Scope 3 disclosures.

A host of trade groups, including those representing food growers, truckers and hospital operators, also voiced their opposition to the legislation.

The U.S. dimension of the climate reporting debate has centered on the Securities and Exchange Commission’s proposed climate disclosure rule, which was announced last year and would apply to the publicly traded companies the agency oversees. That rule as written would also include Scope 3 reporting, though that could change in a final version anticipated later this year.

SEC Chair Gary Gensler has tried to reassure businesses, in particular small private companies that sell to big corporations, that compliance with the rule won’t be overly burdensome. Many have expressed concerns that they would be indirectly swept into accounting exercises as public companies try to determine their supplier emissions. Gensler has emphasized that the SEC isn’t a climate regulator and that it is mainly concerned with providing investors with relevant information.

Academics and investors, though, have argued that private companies deserve scrutiny as well.

“It’s not just investors who have a right to know,” Sen. Wiener told reporters at a climate week event in New York this week. “Consumers have a right to know. Private investors have a right to know, even if it’s not a publicly traded company…There’s a public interest in having that kind of information out there.”

The California legislation will impose direct compliance costs—the SEC has estimated the cost of complying with its similar rule at $530,000 annually for a large company. But the legislation could also subject private companies to the new reputational and stakeholder pressures, said Alperen Gözlügöl, an assistant professor at the law school of the London School of Economics who has called for private companies to disclose their emissions.

“You [currently] have this dark part of the economy where there is no transparency and therefore there is no transparency-related discipline,” Gözlügöl said. “Disclosure makes it easier for these stakeholders to put pressure on companies.”

The legislation will also change the calculus around public companies brown-spinning their carbon-emitting assets by selling them to private companies that can operate them more quietly, Gözlügöl said.

Tackling public companies spinning off dirty assets was one of the legislation’s goals, said California state Sen. Henry Stern, who helped push the bill forward.

Large private companies will be required to directly report their emissions, even if they have only minimal ties to the state, including sales of just $500,000 or property valued at $50,000, according to an analysis by law firm Simpson Thacher & Bartlett. Because of the Scope 3 requirement, they will also have to consider the emissions of companies in their supply chains.

Some private businesses are likely to be caught off guard.

“The California rule is actually quite sweeping,” said Todd Rahn, a senior managing director at FTI Consulting who works with clients on accounting advisory matters. “It is very much a sleeper that is going to catch people and probably be a bit surprising.”

But for proponents, sweeping in private companies is a feature, not a bug, of the California law.

Catherine Atkin, a climate attorney at Stanford Law School who was described by Sen. Wiener’s office as the “legal mastermind” behind the bill, argued that climate reporting should be considered a cost of doing business even for companies that aren’t publicly traded.

“While they may not be accessing the capital markets, they are doing business in California and they are benefiting from the incredible largess and engine that is the California economy,” she said. “California has a right to ask about basic data about their carbon footprint.”

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September 21, 2023

AI Reduces Legal Involvement in Workers’ Compensation Lost-Time Claims by 15%, Saving Insurers Millions

Gradient AI, a leading enterprise software provider of artificial intelligence (AI) solutions in the insurance industry, today announced the results of a comprehensive research study showing that AI-enabled workers’ compensation claims management reduced legal involvement for lost-time claims by 15%. This reduction translates into a 5% savings in lost-time claim costs, equating to an estimated annual savings of $3.5 million based on the study’s insurers managing an average of $70 million in lost-time claims. "Our goal was to better understand AI’s potential to deliver value and shape critical decisions around workers’ compensation claims,” said Stan Smith, CEO and founder of Gradient AI. “This study reaffirms that AI is a valuable tool in managing these claims, especially in avoiding costly legal fees and time-consuming litigation. The results not only show substantial cost reductions but also highlight AI's potential to streamline the claims process, benefiting injured workers, employers, and insurers. It’s a win-win-win, making the results of the study particularly gratifying." Legal involvement is a major cost driver in casualty claims, particularly in the context of lost-time claims. These are cases where an injury is severe enough to require the injured employee to remain out of work for an extended period of time. To better understand the efficacy of AI models trained on industry data lakes, Gradient AI conducted a comprehensive study on workers’ compensation claims. This research encompassed an analysis of over 200,000 lost-time workers' compensation claims, collected from a diverse pool of more than 60 insurance carriers over a 10-year period. Within this dataset, half of the 200,000 claims underwent assessment prior to the integration of AI, while the remaining half were evaluated after AI implementation. Key Findings 15% Reduction in Legal Involvement: Gradient AI's researchers found that lost-time workers' comp claims involving lawyers cost 3x more than claims without legal involvement and lasted nearly 2x as long. The study revealed that insurers leveraging AI effectively reduced legal involvement by 15% because AI models were able to assess claim complexities, predict the likelihood of legal involvement, and provide early warnings to claims adjusters. 5% Reduction in Lost-Time Claims Costs: AI's proactive identification of potential legal engagements resulted in a notable 5% reduction in lost-time claims costs, equivalent to an annual $3.5 million based on the study’s insurers averaging $70 million in lost-time claims. This savings was achieved by providing adjusters with early alerts regarding injury severity and changes in claims status. Early alerts enabled timely actions such as additional attention and outreach by the claims manager and proactive steps to arrange for additional medical treatment. Mitigated the Three Primary Reasons for Legal Representation: Three key factors drive claimants to seek legal representation:
  1. Erosion of Trust: Prolonged open claims can erode trust between claimants and insurance adjusters over time. AI mitigated this by expediting the process, reducing the need for claimants to seek legal assistance.
  2. Fear of the Unknown: Claimants often seek legal counsel as a safety net when facing severe injuries or doubts about recovery. AI provided insurers with the ability to proactively address these concerns, thus avoiding legal escalation.
  3. Intent to Litigate: Some claimants are determined to pursue legal action. AI empowered insurers to intervene early, potentially averting costly legal engagement.
Gradient AI's study demonstrated that early warnings, based on AI models trained on an extensive industry data lake of workers' compensation policies and claims, enable insurers to proactively manage claims much more efficiently and effectively. This approach results in faster resolution, reduced legal involvement, and substantial cost savings. “This research unveils how AI insights empower insurers to take proactive measures,” said Jeff Snider, GM of Property & Casualty, Gradient AI. “As an attorney, I recognize the importance of minimizing the cost of legal involvement. This study demonstrates how AI’s predictions provide adjusters with an early warning, enabling them to significantly mitigate legal involvement." Full details of the study are available on Gradient AI’s website. About Gradient AI Gradient AI is a leading provider of proven artificial intelligence (AI) solutions for the insurance industry. Its solutions improve loss ratios and profitability by predicting underwriting and claim risks with greater accuracy, as well as reducing quote turnaround times and claim expenses through intelligent automation. Unlike other solutions that use a limited claims and underwriting dataset, Gradient's software-as-a-service (SaaS) platform leverages a vast industry data lake comprising tens of millions of policies and claims. It also incorporates numerous other features including economic, health, geographic, and demographic information. Customers include some of the most recognized insurance carriers, MGAs, MGUs, TPAs, risk pools, PEOs, and large self-insured employers across all major lines of insurance. By using Gradient AI's solutions, insurers of all types achieve a better return on risk. To learn more about Gradient AI, please visit:
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September 21, 2023

Flood Insurance Program Faces a Backlash—and a Deadline

A federal program that provides critical flood insurance is set to lapse unless renewed by the end of the month, potentially stranding new home buyers in need of coverage.

The National Flood Insurance Program provides a safety net for the increasing number of communities that are vulnerable to flooding and might not have access to any other coverage. Now lawmakers are deadlocked over extending the program, which is facing a backlash over a new pricing model intended to make premiums better reflect a home’s risk.

“The only thing worse than what we have is nothing,” said Sen. John Kennedy (R., La.), whose bill to extend the program by one year was blocked last week.

Congress may find a way to renew the program before it lapses on Oct. 1 or shortly after, as in years past, through legislation that is either separate from or part of the budget fight to prevent a government shutdown. The deadline comes at a critical juncture for the 55-year-old program.

The Federal Emergency Management Agency is being sued by 10 states that want to block the program’s revamped pricing, which was intended to help address its decadeslong funding shortfalls and to prevent homeowners in relatively low-risk areas from continuing to subsidize those in flood-prone ones.

The new pricing will take several years to be fully implemented and result in rate hikes for two-thirds of the program’s 4.7 million policyholders, according to the Government Accountability Office. The states suing FEMA say the new rates could drive people out of flood zones, slam property values and even lead to people losing their homes because they can no longer afford insurance that is a condition of their mortgages.

Average annual premiums will eventually more than double in 12 coastal and landlocked states under the revamp, according to a report this week by First Street Foundation, a research firm. The county with the steepest increase is in Louisiana, where the average premium in Plaquemines Parish will surge more than sixfold to $5,431 from $842 in coming years once the new premiums are in full effect, according to First Street. “Flood insurance policies have become their own natural disaster,” said Jeff Landry, the attorney general for Louisiana who is leading the states’ lawsuit.

Other states where average premiums more than doubled include hurricane-prone Florida and Mississippi, as well as Kentucky, South Dakota and West Virginia.

David Maurstad of the National Flood Insurance Program said that FEMA doesn’t have the authority to consider affordability when setting premiums but that the agency “continues to work with Congress to examine flood insurance affordability options.”

Previously, premiums were based on an outdated model that FEMA said no longer accurately reflected a home’s risk of flooding. Critics said the cheap insurance encouraged people to buy pricey homes in flood-prone areas, in part by repeatedly bailing them out.

More than 3,000 properties had 10 or more claims from 1978 through 2022, according to FEMA. Nearly two-thirds of those were in five states: Louisiana, Texas, New Jersey, Missouri and New York.

To help shore up its funding, FEMA last year asked Congress to consider letting it drop coverage on properties that received four or more claim payments of at least $10,000. Congress has yet to take any action.

Since the program caps rate increases at 18% a year, it will take until 2037 before the new premiums are being charged for 95% of current policies, the GAO estimated. That delays the full impact of rate increases for several years for policyholders but leaves the program with $27 billion less in premium revenue than it otherwise would have.

Already, the program’s failure to charge adequate rates for years has dug it deep into debt. It is paying $1.7 million in interest a day to the Treasury on $20.5 billion in loans, even after Congress forgave it $16 billion of debt in 2017. Meanwhile, the program has lost almost a million policyholders since 2009, despite floods becoming more frequent and costly. In counties affected by Hurricane Idalia last month, fewer than one in five homes on average had federal flood insurance, according to an analysis for The Wall Street Journal by private insurer Neptune Flood.

A failure by Congress to renew the program wouldn’t stop claims from being paid. But it could affect home purchases in high-risk flood zones and derail thousands of closings in the peak of hurricane season, according to the Insurance Information Institute, an industry group.

In the last six years, lawmakers have allowed the program to lapse briefly three times, according to FEMA.

It isn’t yet clear how lawmakers will try to extend the program. A renewal could be included as a provision in any temporary funding legislation to keep the government running.

Sen. Kennedy of Louisiana is also expected to again try and pass his legislation for an extension.

His attempt last week was blocked by Sen. Mike Lee (R., Utah), who said he wasn’t willing to agree to “yet another hollow promise” of reforms.

“It’s a broken subsidy program,” Lee said.

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