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New Illinois BillsWould Harm — Not Help — Auto Policyholders

Two bills proposed in Illinois this year illustrate yet again the need for lawmakers to better understand how insurance works. Illinois HB 4767 and HB 4611 – like their 2023 predecessor, HB 2203 – would harm the very policyholders the measures aim to help by driving up the cost for insurers to write personal auto coverage in the state.

“These bills, while intended to address rising insurance costs, would have the opposite impact and likely harm consumers by reducing competition and increasing costs for Illinois drivers,” said a press release issued by the American Property Casualty Insurance Association, the Illinois Insurance Association, and the National Association of Mutual Insurance Companies. “Insurance rates are first and foremost a function of claims and their costs. Rather than working to help make roadways safer and reduce costs, these bills seek to change the state’s insurance rating law and prohibit the use of factors that are highly predictive of the risk of a future loss.”

The proposed laws would bar insurers from considering nondriving factors that are demonstrably predictive of claims when setting premium rates.

“Prohibiting highly accurate rating factors…disconnects price from the risk of future loss, which necessarily means high-risk drivers will pay less and lower-risk drivers will pay more than they otherwise would pay,” the release says. “Additionally, changing the rating law and factors used will not change the economics or crash statistics that are the primary drivers of the cost of insurance in the state.”

Triple-I agrees with the key concerns raised by the other trade organizations. As we have written previously, such legislation suggests a lack of understanding about risk-based pricing that is not isolated to Illinois legislators – indeed, similar proposals are submitted from time to time at state and federal levels.

What is risk-based pricing?

Simply put, risk-based pricing means offering different prices for the same level of coverage, based on risk factors specific to the insured person or property. If policies were not priced this way – if insurers had to come up with a one-size-fits-all price for auto coverage that didn’t consider vehicle type and use, where and how much the car will be driven, and so forth – lower-risk drivers would subsidize riskier ones. Risk-based pricing allows insurers to offer the lowest possible premiums to policyholders with the most favorable risk factors. Charging higher premiums to insure higher-risk policyholders enables insurers to underwrite a wider range of coverages, thus improving both availability and affordability of insurance.

This simple concept becomes complicated 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.

The confusion is understandable, given the complex models used to assess and price risk and the socioeconomic dynamics involved. To navigate this complexity, insurers hire teams of actuaries and data scientists to quantify and differentiate among a range of risk variables while avoiding unfair discrimination.

While it may be hard for policyholders to believe factors like age, gender, and credit score have anything to do with their likelihood of filing claims, the charts below demonstrate clear correlations.

Policyholders have reasonable concerns about rising premium rates. It’s important for them and their legislators to understand that the current high-rate environment has nothing to do with the application of actuarially sound rating factors and everything to do with increasing insurer losses associated with higher frequency and severity of claims. Frequency and claims trends are driven by a wide range of causes – such as riskier driving behavior and legal system abuse – that warrant the attention of policymakers. Legislators would do well to explore ways to reduce risks, contain fraud other forms of legal system abuse, and improve resilience, rather than pursuing “solutions” to restrict pricing that will only make these problem worse.

Learn More

New Triple-I Issues Brief Takes a Deep Dive into Legal System Abuse

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Louisiana Still Least Affordable State for Personal Auto, Homeowners Insurance

IRC Outlines Florida’s Auto Insurance Affordability Problems

Education Can Overcome Doubts on Credit-Based Insurance Scores, IRC Survey Suggests

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It’s Not an “Insurance Crisis” – It’s a Risk Crisis

Indiana Joins March Toward Disclosure of Third-Party Litigation Funding Deals

Litigation Funding Law Found Lacking in Transparency Department

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New Triple-I Issue Brief Takes a Deep Dive into Legal System Abuse

The increasing frequency and severity of claims costs beyond insurer expectations continue to threaten insurance coverage and affordability. Triple-I’s latest Issue Brief, Legal System Abuse – State of the Risk describes how trends in claims litigation can drive social inflation, leading to higher insurance premiums for policyholders and losses for insurers.

Key Takeaways

  • Insured losses continue to exceed expectations and surpass inflation, notably impacting coverage affordability and availability in Florida and Louisiana.
  • In promoting the term “legal system abuse”, Triple-I seeks to capture how litigation and related systemic trends amplify social inflation.
  • Progress has been made toward increased awareness about the risks of third-party litigation funding (TPLF), but more work is needed.

What we mean when we talk about legal system abuse

Legal system abuse occurs when policyholders, plaintiff attorneys, or other third parties use fraudulent or unnecessary tactics in pursuing an insurance claim payout, increasing the time and cost of settling insurance claims. These actions can include illegal maneuvers, such as claims inflation and frivolous or outright fraudulent claims. Unscrupulous contractors, for example, seek to profit from Assignment of Benefits (AOBs) by overstating repair costs and then filing lawsuits against the insurer – sometimes even without the homeowner’s knowledge. Filing a lawsuit to reap an outsized payout when it’s evident the claims process will likely provide a fair, reasonable, and timely claim settlement can also be considered legal system abuse.

The latest brief provides a round-up of several studies Triple-I and other organizations conducted on elements of these litigation trends. The report, “Impact of Increasing Inflation on Personal and Commercial Auto Liability Insurance,” describes the $96 billion to $105 billion increase in combined claim payouts for U.S. personal and commercial auto insurer liability. The Insurance Research Council highlighted the dire lack of affordability for personal auto and homeowners insurance coverage in Louisiana, along with the state’s exceptionally high claim litigation rates.

Readers will also find an update on the discussion of legal industry trends associated with increased claims litigation. The lack of transparency around TPLF arrangements and the fear of outside influence on cases are attracting the attention of legislators at the state and federal levels. The brief also describes how some law firms may use TPLF resources to encourage large windfall-seeking lawsuits instead of speedy and fair claims litigation. Research findings suggest that consumers have become aware of how ubiquitous attorney ads can influence the frequency of lawsuits, increasing claims costs.

Florida: a case study in the consequences of excessive litigation

While several states, such as California, Colorado, and Louisiana, are experiencing a drastic rise in the cost of homeowners’ insurance, this brief discusses Florida. Property insurance premiums there rank the highest in the nation. Several insurers facing insurmountable losses have stopped writing new policies or left the state in the last few years. In some areas, residents are leaving, too, because of skyrocketing premiums.

Excessive claims litigation isn’t a new issue for insurers, but it can work with other elements to shift loss ratios and disrupt forecasts, rendering cost management more challenging. In Florida, factors such as the rise in home values and frequency of extreme weather events play a significant role, along with the challenges homeowners face in the aftermath: soaring construction costs, supply chain bottlenecks, and new building codes. However, Florida also leads the nation in litigating property claims. While 15 percent of all homeowners claims in the nation originate in the state, Floridians file 71 percent of homeowners insurance lawsuits.

In Florida and elsewhere, increasing time to settle a claim puts a financial strain on insurers, which is passed on to policyholders in the form of higher premiums. Legal system abuse activities are difficult (if not impossible) to forecast and mitigate, hampering insurers’ ability to remain in the market. Therefore, legal system abuse could be one of the biggest underlying drivers of social inflation. Without preventive measures, such as policy intervention and increased policyholder awareness, coverage affordability and availability is at risk.

Triple-I remains committed to advancing the conversation and exploring actionable strategies with all stakeholders. Learn more about legal system abuse and its components, such as third-party litigation funding by following our blog and checking out our social inflation knowledge hub.

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Cellphones Leading Cause of Distracted Driving; Telematics Can Help

By Max Dorfman, Research Writer, Triple-I

Distracted driving—which has significantly increased since the coronavirus pandemic—is most significantly affected by cellphone use, according to a new Issues Brief by Triple-I.

The report, Distracted Driving: State of the Risk, states that cellphone use–which includes dialing, texting, and browsing–was among the most ubiquitous and highest-risk behaviors found in governmental and private sector studies. According to a 2022 national observational survey from the National Highway Traffic Safety Administration (NHTSA), a total of 2.5 percent of drivers stopped at intersections were talking on hand-held phones at any moment during the day in 2021.

The brief also found that the U.S. personal auto insurance industry’s combined ratio—a measure that represents underwriting profitability—increased dramatically from 2022, to 112.2. A combined ratio below 100 indicates an underwriting profit, while one above 100 indicates an underwriting loss.

“As drivers returned to the roads following the pandemic, distracted driving surged, causing higher rates of accidents, injuries, and deaths. This high-risk behavior has worsened in the years since, having huge implications for the insurance industry and their policyholders,” stated Dale Porfilio, chief insurance officer, Triple-I.

The report notes that telematics and usage-based insurance can potentially help insurers—and their policyholders—better understand a driver’s risk profile and tailor auto insurance rates based on individual driving habits.

Indeed, according to an Insurance Research Council survey in 2022, 45 percent of drivers said they made significant safety-related changes in how they drove after participating in a telematics program. An additional 35 percent stated that they made small changes in their driving behavior. Policyholders became more comfortable with having their insurer monitor their driving behavior when it resulted in potentially lower insurance costs during the onset of the pandemic.

“If telematics can influence drivers to change behaviors and reduce the number of accidents, the nation’s roadways will be safer and auto insurance can be more affordable,” Porfilio concluded.

Learn More:

Facts + Statistics: Distracted driving | III

Louisiana Still Least Affordable State for Personal Auto, Homeowners Insurance

Surge in U.S. Auto Insurer Claim Payouts Due to Economic and Social Inflation

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Chubb Highlights Perils Keeping High-Net-Worth People Awake at Night

According to a recent Chubb survey of 800 high-net-worth individuals in the United States and Canada, 92 percent are concerned about the size of a verdict against them if they were a defendant in a liability case – yet only 36 percent have excess liability insurance.

When it comes to liability, Chubb says respondents are most worried about auto accidents, allegations of assault or harassment, and someone working in their home getting hurt. Damage awards are rising dramatically for a number of reasons, according to Laila Brabander, head of North American personal lines claims for Chubb.

“Economic damages historically were based on factors such as the extent of an injury and resultant medical expenses or past and future loss of income,” she said. “But we are seeing a rise in non-economic damages, such as pain and suffering and post-traumatic stress disorder, that overshadow actual economic losses.”

Brabander described a case in which a client at a yoga studio fell onto the person next to her and was sued by the injured party for pain and suffering.

“The same plaintiffs’ tactics to encourage large verdicts in commercial trucking, auto liability, product liability and medical malpractice suits are now being utilized to push for larger jury awards against our high-net-worth clients,” Brabander said.

Another factor driving up the cost of settlements is the third-party litigation funding, in which firms  provide funding to plaintiffs and their lawyers in exchange for a percentage of the settlement. These private-equity firms began in the commercial space and are now funding lawsuits against individuals and their insurers.

High-net-worth people also are deeply concerned about the threats posed to their homes by extreme weather and climate-related events. Much of this concern may be due to increased development in coastal areas vulnerable to tropical storms and flooding and in the wildland-urban interface – areas in which development places property into proximity with fire-prone wilderness (see links below).

Chubb’s findings are based on a survey of 800 wealthy individuals in the United States (650 respondents) and Canada (150 respondents). Respondents had investable assets of at least $500,000, with the majority reporting assets of $1.5 million to $50 million and 12 percent reporting assets of more than $50 million.

Learn More:

Triple-I Issues Brief – State of the Risk: Wildfire

Triple-I Issues Brief – State of the Risk: Hurricanes

What Is Third-Party Litigation Funding and How Does It Affect Insurance Pricing and Affordability?

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Louisiana Still Least Affordable State for Personal Auto, Homeowners Insurance

By Max Dorfman, Research Writer, Triple-I

Louisiana continues to be the least affordable state for personal auto and homeowners insurance, according to a new report by the Insurance Research Council (IRC).

The average annual expenditure for auto insurance in Louisiana was $1,495 In 2020, more than 40 percent above the national average, the report finds. These costs account for 2.93 percent of the median household income in the state, rendering it the least affordable.

Louisianans also pay significantly more for homeowners coverage compared to the national average, with an average annual expenditure of $1,965. These are among the highest rates in the country, representing 3.84 percent of the median household income in the state – 55 percent above the national average.

“The state has faced multiple major weather events, with extensive litigation following each natural disaster,” the report finds. “Rising auto-repair and construction costs, as well as the state’s relatively low household income, have compounded these issues.”

Personal auto cost drivers include:

Accident frequency: The number of property damage liability claims per 100 insured vehicles in Louisiana is 16 percent higher than the countrywide average.

Injury claim relative frequency: Louisianians show a greater propensity to file injury claims once an accident has occurred, with a relative claim frequency almost twice the national average.

Medical utilization: Louisiana auto claimants are more likely than those in other states to receive diagnostic procedures, such as magnetic resonance imaging (MRI).

Attorney involvement: Louisiana claimants are more likely than those in other states to hire attorneys. Attorney involvement has been associated with higher claim costs and longer settlement times.

Claim litigation: The rate of litigation in personal auto claims in Louisiana is more than twice the national average. This rate is the second-highest in the country, surpassed only by Florida.

Homeowners cost drivers include:

Claim frequency, catastrophe claims: The number of catastrophe claims paid for every 100 homes insured for the entire year in Louisiana is almost six times higher than the national average.

Claim severity, catastrophe claims: In the hurricane-prone region, Louisianians are second only to Floridians in the amount paid for the average homeowners insurance claim. Louisiana is 12 percent higher than the national average.

Natural-hazard risk, weather: Louisiana’s exposure to building damage from weather hazards is second only to Florida’s and is dramatically higher than other states.

Claim litigation: Claims in Louisiana were 12 times more likely to involve litigation, compared with states other than Florida.

These issues have led to the insolvency of several carriers and the departure of key insurance providers from the market. Many remaining insurers have chosen to limit coverage and raise premiums.

Louisiana has tried to address these coverage gaps through incentive programs for private carriers and a greater reliance on the state-run insurer Louisiana Citizens Property Insurance Corporation, the last-resort insurance. However, Louisiana Citizens Property Insurance Corporation can be expensive, making it unaffordable for many and especially for the state’s most vulnerable residents.

These hardships have also influenced a population decline in Louisiana, as individuals and businesses are uprooting and seeking improved affordability elsewhere. Louisiana’s population declined by almost 1 percent in 2022, accounting for nearly 39,000 people, according to a new Census estimate.

Learn More:

Louisiana Litigation Funding Reform Vetoed; AOB Ban, Insurer Incentive Boost Make It Into Law

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

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

Hurricanes Drive Louisiana Insured Losses, Insurer Insolvencies

Uninsured Driving Dipped in 2022 After Pandemic Spurred a Multi-year Rise

By Max Dorfman, Research Writer, Triple-I

About one out of seven U.S. drivers (14.0 percent) operated a private-passenger vehicle without liability insurance in 2022, according to new research by the Insurance Research Council (IRC) – like Triple-I, an affiliate of The Institutes.

The IRC report, Uninsured Motorists: 2017—2022, which used data from 10 insurers representing around 56 percent of the U.S. private passenger auto insurance market, found that the percentage of uninsured motorists been rising over the past few years. Indeed, the percentage of uninsured motorists was 11.1 percent in 2019, increased to 13.9 percent in 2020, and stood at 14.2 percent in 2021, before the slight decline in 2022.

The report posits that declining personal income and rising inflation – particularly during the first two years of the coronavirus pandemic – led some motorists to forgo purchasing mandatory auto insurance liability coverage. This shift was particularly apparent during the first two years of the coronavirus pandemic.  In fact, before the pandemic, the number of uninsured U.S. drivers was largely declining, with 40 jurisdictions experiencing decreases from 2017-2019. The largest decrease was in Montana, where the percentage of uninsured drivers on its roadways fell by 4.1 percent during the three-year timeframe.

This, however, was not uniform across the country. The largest percentage increases during the same period were seen in Florida and Michigan. Michigan’s 2019 legislative reform greatly helped alleviate the situation; the state experienced a 6.2 percent decline from 2020-2022.

In 2022, the District of Columbia (25.2 percent), New Mexico (24.9 percent), and Mississippi (22.2 percent) had the highest percentages of uninsured motorists in 2022. Wyoming (5.9 percent), Maine (6.2 percent), and Idaho (6.2 percent) were the three states with the lowest percentage.

Uninsured motorists impose costs for insurers, state governments, and taxpayers. Auto insurers are required by law to underwrite uninsured and underinsured driver coverage and process these claims, as well as complying with regulations in many states requiring insurers to inform the state when auto insurance coverage is canceled. State governments also administer taxpayer-funded programs that monitor the insurance status of motor vehicles registered in the state.