September 25, 2023
California Paves Way for More Insurance Coverage in Disaster-Prone Areas
“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.
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.
September 25, 2023
FTC Poised to Sue Amazon for Antitrust Violations
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.
September 25, 2023
Court Approves Vesttoo to Seize $30M from Fraud Accused Co-Founders & Execs
September 22, 2023
The Future of Fronting Companies
Overview: Fronting CompaniesFronting 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 ModelAs 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 AheadHowever, 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 LOCsInsurtech 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, MGAsOn 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 ERMAccording 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
What AM Best Had to Say About Vesttoo and Fronting CompaniesAM 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 CollateralFitch 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 FraudA 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.
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.
September 22, 2023
Ransomware Drives 12% Uptick in H1 Cyber Claims: Coalition
September 22, 2023
Lyft to Pay $10M for Concealing Director’s Role in Pre-IPO Stock Sale
September 22, 2023
New California Climate Law Pulls In Private Companies
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.”
September 21, 2023
AI Reduces Legal Involvement in Workers’ Compensation Lost-Time Claims by 15%, Saving Insurers Millions
- 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.
- 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.
- Intent to Litigate: Some claimants are determined to pursue legal action. AI empowered insurers to intervene early, potentially averting costly legal engagement.
September 21, 2023
Flood Insurance Program Faces a Backlash—and a Deadline
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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