The enormous amount of uninsured loss from Hurricane Ian will lead to a “veritable swamp” of trial lawyers waiting to sue the insurance industry, according to one industry expert at AAIS Pulse.
“This could be anything from the old wind-versus-water litigation on the lines of what we saw in Hurricane Katrina, and to a lesser degree Sandy,” said Bob Hartwig, professor at the University of South Carolina’s Darla Moore School of Business and director of the school’s Center for Risk and Uncertainty Management.
During the American Association of Insurance Services event from Chicago on Oct. 24, Hartwig predicted that the reverberations of Ian will be heard across the industry, prompting legislative regulatory changes in Florida and potentially serving as a springboard for a conversation about how to build more resilient communities in coastline states.
One outcome of Ian is the reduced presence of reinsurers in the Sunshine State.
Stefan Holzberger, chief rating officer, AM Best said reinsurers are looking at Florida and reassessing where to take actions to improve their performance, including removing aggregate treaties and focusing on lines of business outside of property catastrophe.
“For a concentrated Florida specialist with very limited flexibility, the key to their business model in terms of managing their balance sheet, managing their volatility in terms of operating performance, has been that reinsurance protection. It’s going to be extremely difficult in 2023 to support that business model,” he said.
The aftermath of Hurricane Ian also falls against the backdrop of soaring inflation, which has led to rapid acceleration in claims severity across property and auto lines.
In addition to insurers dealing with higher repair costs, companies are looking to restore rate adequacy, according to Hartwig.
He said present rates don’t reflect the inflationary pressures insurers are seeing today.
“Arguably rates are inadequate today in many situations,” said Hartwig, former president of the Insurance Information Institute. “We’ve seen the loss ratios rise in many states in personal auto as well as in homeowners by 10, 15 or 20 points in some instances.”
Hartwig added that it will likely be a multi-year effort to get rates where they need to be.
“The problem is not only these costs rising rapidly today, but the rates that are in place today for an auto or home or commercial property insurer were built on historical trends over the past five, 10 years or more ending probably in 2021,” said Hartwig.
Another trend brought up by both speakers is the state of the tort environment.
Hartwig said tort-system abuse is rampant in the United States, citing about 1,400 nuclear verdicts – verdicts over $10 million – in the past couple of years. Hartwig said the average cost of nuclear verdicts has increased from $19 million to $24 million.
“The trial lawyers are not only very successful at what they’re doing, they are the best funded, best organized special interest group in the United States,” said Hartwig.
Holzberger said that for insurers to maintain a level of reserve adequacy, they should use data analytics and technology to identify claims most likely to be targeted by the trial bar.
“Really identify where as an insurance organization you can push back and maintain the contractual that are going to drive that ultimate claims resolution,” said Holzberger.
While insurers need to do more at the political level to combat the strength of the plaintiff’s bar, Holzberger said it’s important for companies to face the reality that they are going to be exposed to costly claims.
“Most of the insurance companies that we follow, they work very hard to avoid reserve deficiencies,” said Holzberger. “You’re pretending that your balance sheet is stronger than it is, you’re pretending that your underwriting performance is stronger than it is. Really the impetus to get the reserves right, even if there’s some bad news in there, I think is going to lead to a healthier organization even if it’s painful to do so.”
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